March 19, 2021

Books & Records: Can Inspection Rights be Waived in Delaware?

This Sidley blog notes that recent Delaware case law suggests that entities may limit the right of equity holders to demand inspection of books & records. Whether stockholder inspection rights may be completely waived is an open question, but this excerpt lays out some of the reasons why such a waiver might be possible:

In the corporation context, Delaware courts have recognized waiver as to several rights set forth in the Delaware General Corporation Law, including stockholders’ appraisal rights under Section 262, rights to end a joint venture or seek liquidation under Section 273, or rights to seek a receivership under Section 291. Although we are not yet aware of a decision holding that stockholders validly waived inspection rights under Section 220, the Court of Chancery has recently suggested (without reaching the issue) that there may be strong considerations to support waiver of inspection rights in some circumstances—including “Delaware’s broad recognition of parties’ ability to waive other important rights, whether constitutional or statutory”—and that other recent Delaware precedent “implies that a stockholders’ agreement could waive statutory inspection rights if the waiver was sufficiently clear.”

But the method may be key: though Delaware courts have refused past efforts to limit Section 220 rights through provisions in the corporation’s charter, as the same court noted (again, in dicta), “there are arguments for distinguishing between provisions that appear in those documents and waivers in private agreements.” How Delaware courts will receive those arguments remains to be seen.

While the ability to waive inspection rights remains unresolved, given the surge in books & records demands in recent years and the disruption they cause, the blog suggests that companies may wish to consider including limits on inspection rights in their charter documents or negotiating for contractual limits on inspection rights with at the time of a stockholder’s investment.

John Jenkins