Founders Alert: Be Aware of Stockholder Inspection Rights

We want to make sure founders are aware of a Delaware law that stockholders are using with increasing frequency to inspect the books and records of the Delaware corporations in which they hold stock.

Section 220 of the Delaware General Corporation Law provides stockholders with the right “to inspect for any proper purpose . . . [t]he corporation’s stock ledger, a list of its stockholders, and its other books and records.” One proper purpose is the valuation of a stockholder’s shares through inspection of the company’s financial records. A recent Wall Street Journal article described Section 220 as “a potentially invaluable tool for thousands of tech workers who received stock awards to join fast-growing startups, as well as other small investors, who now question their shares’ worth.”

A company has two options in response to a stockholder’s inspection request. First, it may refuse the inspection request if the stockholder has not established that he, she or it (i) is in fact a stockholder, (ii) has complied with Section 220’s procedural requirements, such as the requirement that the demand be under oath, or (iii) seeks inspection for a proper purpose. Second, a company may agree to permit inspection subject to certain conditions, such as the stockholder’s signing a suitable nondisclosure agreement.

If a company refuses to permit inspection, or cannot agree with the stockholder on the scope of the books and records to which the stockholder will have access (or the conditions on which the company will grant that access), the stockholder may apply to the Delaware Court of Chancery for an order to compel inspection. Founders should discuss with outside counsel how to comply with Section 220 in the event that they receive a stockholder demand.

Founders should be aware that stockholders may contractually waive their inspection rights under Section 220, but a company cannot impose such a waiver in its charter or bylaws. Any contractual waiver must explicitly refer to Section 220 and affirmatively express the stockholders’ waiver of their statutory rights. We have updated the stock restriction agreement template on our Founders Workbench Document Driver® to include a contractual waiver of inspection rights under Section 220.

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