Following Corwin v. KKR Financial Holdings and other Delaware cases that have reinforced the standards that stockholder suits must meet to survive dismissal, would-be litigants have increasingly invoked Section 220 of the Delaware General Corporate Law (“Section 220”) to try to obtain corporate books and records in order to use those materials to bolster claims in subsequent litigation. In Donnelly v. Keryx Biopharmaceuticals, Inc., C.A. No. 2018-0892-SG (Del. Ch. Oct. 24, 2019), the Delaware Court of Chancery revisited the issue of what is a proper purpose under Section 220 and to what extent a stockholder’s purpose must match the purpose stated in her demand letter.

BACKGROUND -

Section 220 provides stockholders with a means of inspecting the corporate books and records of a Delaware corporation for a proper purpose so long as specific requirements are met. The statute defines proper purpose as “reasonably related to the party’s interest as a stockholder.” In November 2018, a stockholder of Keryx Biopharmaceuticals, Inc. (“Keryx”) sent a Section 220 demand seeking information about the company’s recent merger with Akebia Therapeutics, Inc. The stated purpose of the demand was to investigate possible breaches of loyalty based on the fairness of the merger price, the potential influence of Keryx’s largest stockholder, bonuses paid to management in connection with the merger, the independence of the board, and improper disclosure. Keryx refused to produce any documents in response, and the stockholder filed a Section 220 action to compel a response.