Delaware Supreme Court Signals Flexibility in Section 220 Actions

The Delaware Supreme Court, in a closely divided 3–2 decision, has refined the evidentiary standards governing Section 220 of the Delaware General Corporation Law (DGCL), which permits stockholders to demand inspection of corporate books and records. Writing for the majority, Justice Traynor reaffirmed the foundational requirement that stockholders must establish a "credible basis" for suspected wrongdoing based on information available at the time of demand. However, the Court recognized that rigid adherence to this temporal limitation may undermine the statute's purpose in dynamic, high-profile corporate situations where facts continue emerging after a demand is served.

The case centered on contested transaction speculation involving Paramount Global and its controlling stockholder Shari Redstone through National Amusements, Inc. News outlets, citing anonymous sources, reported that Redstone might be directing a transaction toward a sale of her family's controlling interest rather than a full company sale. These reports prompted the Employees' Retirement System of Rhode Island to demand inspection of Paramount's books and records to investigate potential fiduciary breaches. The Court of Chancery initially rejected the demand as insufficiently documented, declining to consider post-demand news reports. However, Vice Chancellor Laster, on de novo review, concluded that post-demand evidence could inform the credible-basis inquiry and that reporting from reputable outlets, even when based on anonymous sources, could be sufficiently reliable for analysis.

The Delaware Supreme Court threaded a measured path between these positions. Rather than establishing categorical rules, the Court held that nothing in Section 220's text prohibits consideration of post-demand evidence, but such evidence should remain exceptional. Courts retain discretion to consider or reject post-demand evidence case-by-case, provided such evidence is material and does not unfairly prejudice the corporation. On anonymous sourcing, the Court rejected blanket discounting while resisting the notion that publication in a reputable outlet alone suffices; instead, reliability must be assessed contextually based on totality of circumstances.

For practitioners, implications are incremental but substantive. Stockholders may initiate Section 220 demands earlier during unfolding corporate events, with confidence that subsequent developments could potentially inform judicial analysis. Conversely, corporations should anticipate continued litigation over what qualifies as "exceptional circumstances," a term the Court deliberately left undefined to preserve judicial flexibility. The decision preserves the discipline of the demand requirement while acknowledging that contested transactions do not always unfold within neat procedural timelines, leaving Section 220 a limited but potentially more adaptable tool in appropriate contexts.