Delaware Chancery Court Section 220 Inspection Demand Mechanics and Enforcement
Delaware Section 220 demands require strict execution formalities, verified proof of ownership, and a credible basis to inspect targeted board records.
Credible Basis Standard
Meaning
Minimum level of proof a shareholder must present to justify a request to inspect company documents. The credible basis standard is the lowest burden of proof in the law, requiring only that the investor show some evidence of possible mismanagement or wrongdoing. It acts as a filter to prevent fishing expeditions while still allowing legitimate oversight by owners.
This threshold ensures that the corporation is not burdened by frivolous demands for data.
Investigative Justification
Shareholders meet this requirement by providing hearsay or circumstantial evidence that suggests a breach of fiduciary duty. A credible basis standard does not require the investor to prove that wrongdoing actually occurred, but only that there is a reason to look deeper.
Evidentiary Burden
Testimony from a whistleblower or a report of a regulatory investigation is usually enough to satisfy a chancellor. The court balances the right of the owner to know what is happening with the right of the board to run the business without constant interference.
Mismanagement Suspicion
Mere disagreement with a business decision is not enough to meet the test. There must be a specific concern about the legality or the honesty of the actions taken by the executives.