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Inspection under Del. Code Ann. tit. 8, § 220 is not automatic upon a statement of a proper purpose. First, a defendant may defeat demand by proving that while stating a proper purpose, the plaintiff's true or primary purpose is improper. Second, the plaintiff who states a proper purpose must also present some evidence to establish a credible basis from which a court of chancery could infer there are legitimate concerns regarding a director's suitability. That is, a stockholder must establish a credible basis to infer that a director is unsuitable, thereby warranting further investigation. Third, the plaintiff must also prove that the information it seeks is necessary and essential to assessing whether a director is unsuitable to stand for reelection. Finally, access to board documents may be further limited by the need to protect confidential board communications. Thus, accepting that a desire to investigate the "suitability of a director" is a proper purpose does not necessarily expose corporations to greater risk of abuse.
Plaintiff Westland Police & Fire Retirement System brought the present action under Section 220 of the Delaware General Corporation Law to review books and records of the defendant Axcelis Technologies, Inc. (“company”). Plaintiff alleged two suspect incidents of wrongdoing – the first was the company' board's handling of two acquisition proposals, and the second was the board's refusal to accept the resignations of the three directors who failed to receive an affirmative majority vote at an annual meeting. The Court of Chancery of the State of Delaware dismissed plaintiff’s action under Del. Code Ann. tit. 8, § 220, holding that plaintiff had not met its evidentiary burden to demonstrate a “proper purpose” for inspecting the company’s records. On appeal, plaintiff argued that the Court of Chancery incorrectly applied the "credible basis" standard by requiring the plaintiff to present affirmative evidence of wrongdoing. Plaintiff further argued that the court should adopt the Blasius standard when reviewing a board of directors' decision to reject director resignations in cases where a "plurality plus" governance policy (or by-law) was triggered and required that resignations be tendered. Under Blasius, a corporation's board must demonstrate a "compelling justification" for board-adopted measures that interfere with, or frustrate, a shareholder vote.
Under the circumstances, was plaintiff entitled to review books and records of the defendant company?
The state supreme court found, inter alia, that the record provided no credible basis to infer that the board's rejections of the acquisition proposals, its refusal to extend the deadline for a revised acquisition bid, and its rejection of certain director resignations were other than good faith business decisions. The court further held that plaintiff’s Blasius argument improperly attempted to shift to the company the shareholder's burden to establish a "proper purpose" for a § 220 inspection. The plaintiff’s mere statement of a purpose to investigate possible general mismanagement, without more, did not entitle it to broad § 220 inspection relief.