Delaware Supreme Court Signals Flexibility In Section 220 Actions

In a closely divided 3–2 decision, the Delaware Supreme Court has added an important nuance to the way courts evaluate books-and-records demands under Section 220 of the Delaware General Corporation Law (DGCL). While the opinion does not upend the existing doctrine, it does introduce a measure of flexibility in connection with such demands, particularly in fast-moving, high-profile situations where the factual record continues to develop after a demand is made.

At its core, the case considers a straightforward question: whether the Court of Chancery erred by considering post-demand evidence and confidentially sourced information when a stockholder sought to investigate potential wrongdoing using the Section 220 mechanism. The answer, the Delaware Supreme Court said, is generally yes, albeit subject to certain exceptions.

Writing for the majority, Justice Traynor reaffirmed the traditional rule that a stockholder must establish a “credible basis” for suspected wrongdoing based on information available at the time of the demand. But the Court also recognized that rigid adherence to that rule may not always serve the statute’s purpose. In “exceptional circumstances,” the Delaware Court of Chancery may consider post-demand evidence, so long as such evidence is material to the inquiry and does not unfairly prejudice the corporation.

The dispute arose from widely reported deal speculation involving Paramount Global (Paramount) and its controlling stockholder, Shari Redstone, through National Amusements, Inc. News outlets, often citing anonymous sources, suggested that Redstone might be steering a transaction toward a sale of her family’s controlling stake, rather than a sale of the company as a whole. Those reports prompted the Employees’ Retirement System of Rhode Island (ERS) to serve a demand to inspect Paramount’s books and records to investigate whether fiduciary misconduct might be at play.

What followed was a procedural back-and-forth that ultimately framed the Delaware Supreme Court’s analysis. A magistrate initially rejected the stockholder’s demand, holding that the evidentiary record was too thin and declining to consider news reports that emerged after the demand was sent. On review, Vice Chancellor Laster took a different view following a de novo review of the facts and the law. The Vice Chancellor concluded that, in some circumstances, post-demand evidence could properly inform the credible-basis inquiry and that reporting from reputable outlets, even when based on anonymous sources, could be sufficiently reliable to factor into that analysis.

The Delaware Supreme Court’s decision threads a careful line between those positions. It declined to adopt a categorical rule barring post-demand evidence, pointing out that nothing in the text of Section 220 imposes such a limitation. At the same time, it was equally clear that the exception should remain just that (i.e., an exception). The credible-basis inquiry is still anchored in what the stockholder knew when it made its demand, and courts should depart from that framework only when exceptional circumstances genuinely warrant it.

The Delaware Supreme Court took a similarly measured approach to the use of anonymous sources in news reporting. It rejected any suggestion that such material should be discounted outright but also resisted the idea that publication in a reputable outlet is, by itself, enough. Instead, the Court emphasized that reliability must be assessed in context, based on the totality of the circumstances. In this case, it was satisfied that the Vice Chancellor’s reliability analysis fell within the bounds of reasonable judgment and, therefore, passed muster on applicable standards of review.

For practitioners, the implications are incremental but meaningful. Stockholders may feel emboldened to act earlier, even as events are still unfolding, knowing that later developments could potentially be considered. At the same time, corporations can expect continued litigation over what qualifies as “exceptional circumstances,” a phrase the Delaware Supreme Court left deliberately undefined. Indeed, the Court underscored that “[o]n balance, given our conclusion that § 220 itself does not by its terms prohibit the introduction of post-demand evidence, we deem it best to allow the judicial officers of the Court of Chancery to exercise their discretion and to consider or reject post-demand evidence on a case-by-case basis.” As a result, the Delaware Supreme Court preserved the discipline of the demand requirement, while acknowledging that corporate events, particularly contested transactions, do not always unfold neatly within procedural timelines. Section 220 remains a limited tool but one that, in the right case, may now be applied with a bit more flexibility than before.