Section 220 of the Delaware General Corporation Law Amendments: everything you need to know
Amendments to Section 220 of the Delaware General Corporation Law (DGCL) came into effect on March 25, 2025, affecting shareholder inspection rights across the state. Section 220 provides shareholders with the right to inspect a corporation’s books and records for a “proper purpose” - usually to investigate potential wrongdoings, assess valuation, or understand corporate governance practices. Often, Section 220 is used as preparation for a stockholder lawsuit and is common practice during litigation against corporations.
While shareholder inspection rights are extremely important, as when properly used they can help reveal information that can dissuade unnecessary lawsuits, there has been a fear from corporations and boards that they could be misused. The amendment to Section 220 of the DGCL means that shareholders now have the right to inspect a corporation’s books and records for a “proper purpose,” with the hope that this prevents abuses of inspection rights by introducing clear standards.
Section 220: the background
Section 220 allows shareholders to inspect a Delaware corporation’s books and records and is known as a critical accountability mechanism. It allows for investigation into potential wrongdoing and can help push for key policy changes if issues are found.
While Section 220 is encouraged, since it provides transparency and reduces potential wrongdoing at corporations, inspection rights are not unlimited. An inspection request must clearly demonstrate a proper purpose, such as investigating mismanagement, and show a credible basis for possible wrongdoing. Requests should also only pertain to documents that are necessary and essential to the purpose of the investigation and not go beyond the scope of the request.
The role that Section 220 plays in corporate accountability and litigation cannot be understated; it helps to build a successful case against a corporation through the gathering of relevant evidence and can help demonstrate the strength of a case before a filing is made.
Why was Section 220 amended?
Various concerns surrounding Section 220 led to the key amendments and were driven by several factors:
Rising litigation and overbroad requests: The number of legal disputes related to the scope and process of Section 220 demands increased over time, largely due to shareholders submitting what were viewed as overbroad requests. Courts began permitting access to materials beyond traditional corporate records, often to support potential future litigation. These so-called “fishing expeditions” placed a significant burden on corporations.
Challenges with electronic communications: Inspection demands increasingly began to include electronic communications such as emails and text messages. This raised questions about relevance and necessity, often resulting in legal disputes.
Threats of reincorporation in other states: The mounting litigation risks associated with Section 220 prompted some Delaware corporations to consider reincorporating in states like Texas or Nevada, threatening Delaware’s status as a preferred jurisdiction for incorporation.
These amendments show Delaware’s attempt to strike a balance between holding companies accountable to shareholders and preserving corporate decision-making freedom. By doing so, Delaware makes the process fairer for both sides and reinforces its reputation for fair, reliable, and predictable corporate governance.
What do the amendments to Section 220 of the DGCL entail?
The amendments to Section 220 clarify shareholder inspection rights. Although the amendments to Section 220 officially took effect on March 25, 2025, they apply retroactively to inspection demands, proceedings, and records initiated on or after February 17, 2025, which was the date the legislation was first introduced in the Delaware General Assembly. However, they do not apply to any actions or demands that were pending or completed on or before that date.
Among the key changes to Section 220 of the DGCL, the most pertinent were the following:
Expanded definition of “books and records”: To prevent corporations from avoiding production of certain materials, the amendments provided greater specificity by defining what qualifies as “books and records.” This now includes financial statements, charter documents, bylaws, and shareholder agreements, board materials and meeting minutes, and director questionnaires.
Temporal limitations: A three-year limitation for the discovery of certain documents was introduced, reducing the burden on corporations and minimizing expansive historical requests.
Procedural safeguards: This amendment emphasizes that shareholder demands are made in good faith and that their reasons for request are reasonable and relate directly to the articulate purpose. This allows corporations to challenge any vague or overly broad investigation demands to prevent “fishing expeditions.”
Confidentiality restrictions and redactions: Corporations can now redact information unrelated to the discovery purpose from certain documents and impose confidentiality restrictions on certain materials. While this provides corporations with more protection, shareholders argue it could result in unreasonable restrictions which affect the discovery process.
Use in litigation: Inspected materials are now automatically included in any subsequent shareholder litigation. This increases fairness, as it means shareholders cannot selectively cite documents that create a biased position.
Functional equivalents: Courts may now compel production of functional equivalents (such as electronic communications) if formal records are absent. For example, if board decisions were made via email, these are discoverable. This ultimately prevents corporations from avoiding disclosure through lacking formal records.
Compelling need and clear and convincing evidence: Underpinning the amendments is the fact that shareholders must now demonstrate a compelling need for discovery with clear and convincing evidence before they will be allowed to examine books and records. This amendment is applied for requests where sensitive or non-traditional records need to be looked at.
Corporate defenses against Section 220 demands
One of the main goals behind the amendments was to protect corporations from unfair or overly broad shareholder investigations. As a result, companies now have clearer grounds to push back against Section 220 demands in the following situations:
Pretextual or improper purpose: If the request isn’t genuinely tied to the shareholder’s interest as a shareholder, for example, if it's meant to support outside litigation or a takeover attempt, it can be rejected.
Procedural deficiencies: A demand may be denied if the requester lacks legal standing or if the demand letter is improperly delivered or missing key legal elements.
Overbroad or vague requests: Corporations can resist demands that ask for more information than is reasonably necessary or are too unclear to act on.
Confidentiality and privilege protections: Requests that involve sharing sensitive or legally protected information may also be refused
What are the practical implications of Section 220 amendments?
For shareholders, the changes offer expanded access to corporate records, including electronic documents, making it easier to investigate corporate conduct. However, this increased access comes with stricter procedural requirements. Requests must be specific, backed by evidence, and aligned with a proper purpose. Additionally, new confidentiality provisions may limit access to certain sensitive documents.
Corporations, on the other hand, benefit from stronger defenses against inspection demands. They can now invoke confidentiality protections to safeguard sensitive information and reduce the risk of misuse. That said, the introduction of the “functional equivalent” provision means companies must be more diligent with recordkeeping. If formal records are lacking, shareholders may gain access to alternative documents that serve the same function.
From a broader policy perspective, future litigation is likely to focus on how confidentiality is defined, how the functional equivalent rule is applied, and whether the three-year limitation strikes the right balance between transparency and efficiency.
Strategically, both sides must adapt. Shareholders need to craft precise, well-supported demands to gain access to records. Corporations must maintain thorough documentation, regularly review their recordkeeping practices, and apply confidentiality protections thoughtfully to avoid legal challenges.
What actions should corporations take?
In light of Section 220 amendments, it’s crucial for corporations to proactively prepare for potential shareholder inspection demands. This means placing a strong emphasis on process, documentation, and transparency to reduce the risk of disputes. Boards should ensure that all decision-making is thoroughly documented and follows established procedures, including clear records showing directors acted independently and in good faith.
Being proactive not only helps companies stay compliant and ready for inspections; it also fosters trust and professionalism in interactions with shareholders. Transparent and well-managed responses can prevent misunderstandings from escalating into costly litigation, which ultimately protects the corporation in the evolving legal landscape.
If you need help preparing your business for Section 220 amendments or require assistance with your entity compliance, Computershare Entity Solutions can help. Contact us to find out how we can support you.
Disclaimer: Information provided on this page is not legal or financial advice. Consult an attorney and/or financial professional for legal or financial matters.