Shareholder rights (at least in Delaware) include the right to inspect the books and records of the company for a “proper purpose”. What is a proper purpose? We’ll be covering a number of cases in the coming months on this oft-contested issue. For today: enter Woods Tr. of Avery L. Woods Tr. v. Sahara Enterprises, Inc., No. CV 2020-0153-JTL, 2020 WL 5200421, at *5 (Del. Ch. July 22, 2020), judgment entered sub nom. In re Woods v. Sahara Enterprises, Inc. (Del. Ch. 2020), reaffirming the proposition that the ascertainment of the value of a shareholders interest in a (here, private) company is a proper purpose.
In Woods, a trustee sought books and records from a private company in order to determine the value of the Trust’s interest in the company. The company argued that a shareholder claiming a valuation purpose should be required to show not only a proper purpose for the investigation, but also a proper ‘end use’ for the resulting valuation. In other words: was the trustee really seeking books and records to establish a valuation?
The Chancery Court dismissed this argument, writing “The Company’s position is contrary to Delaware law. It would require that a stockholder establish both a proper purpose (valuing shares) and an end use for the resulting valuation.” The Court continued: “It is sufficient under Delaware law that a stockholder has a proper purpose reasonabl[y] related to its interests as a stockholder, such as valuing its shares.” The Court refused to engage in the end use analysis as beyond Delaware law.
The Woods case contains additional analysis beyond the proper purpose analysis that we will cover in the future.
For investors, the scope of what is a proper purposes versus improper purpose is critical to determining their inspection rights. One tentpole: valuation of an interest is generally a proper purpose.