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CALIFORNIA CORPORATE & SECURITIES LAW

Delaware Inspection Ruling May Cause Yahoo! Inc. To Regret Not Incorporating In Nevada

In a recent blog post, Delaware lawyer Francis Pileggi discusses a recent ruling by Vice Chancellor J. Travis Laster ordering Yahoo! Inc. to produce personal emails of directors and electronically stored information in response to a stockholder inspection demand pursuant to Section 220 of the Delaware General Corporation Law.  Amalgamated Bank v. Yahoo!, Inc., C.A. No. 10774-VCL (Del. Ch. Feb. 2, 2016).  The ruling caused me to reflect on how Nevada’s stockholder inspection statute, NRS 78.257, compares to Delaware’s Section 220.

Who may inspect.  Nevada grants inspection to “Any person who has been a stockholder of record of any corporation and owns not less than 15 percent of all of the issued and outstanding shares of the stock of such corporation or has been authorized in writing by the holders of at least 15 percent of all its issued and outstanding shares”.  NRS 78.257(1).  Delaware is much more egalitarian, granting inspection rights to “any stockholder”.

Exceptions.  Nevada’s inspection statute does not apply to: (i) any corporation that furnishes to its stockholders a detailed, annual financial statement, or (ii) any corporation that has filed during the preceding 12 months all reports required to be filed pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934.  NRS 78.257(6) (there is an exception for certain Subchapter S corporations).  Delaware, in contrast, does not grant similar exceptions.

Records covered.  Nevada’s statute allows inspection and audit of the corporation’s “books of account and all financial records”.  Delaware’s statute grants access to the corporation’s “books and records”.  While Delaware’s statute is broader on its face, the Court of Chancery should limit the scope to records “‘essential’ for the plaintiff to achieve its purpose, but should stop at the quantum of information that the court deems ‘sufficient'”.  Amalgamated Bank, (citing Thomas & Betts Corp. v. Leviton Mfg. Co., 681 A.2d 1026, 1035 (Del. 1996)).

Purpose.  Nevada does not require a stockholder to cite a purpose for the inspection, but does permit the corporation to deny inspection if the stockholder refuses to furnish an affidavit to the effect that the inspection is not desired for any purpose not related to the stockholder’s interest in the corporation as a stockholder.  Delaware requires a stockholder to establish a proper purpose by a preponderance of the evidence.  Thus, Nevada’s statute requires a disavowal of any improper purpose while Delaware requires proof of a proper purpose.

In light of the above differences, Yahoo! Inc. may be regretting its decision to incorporate in Delaware  If Yahoo! Inc. were a Nevada corporation, it likely would not be subject to Nevada’s statute (either because it furnishes an annual report to stockholders or has filed all required reports under Section 13 of the Exchange Act).

Note to readers:  Nevada has a different statute governing inspection of the stock ledger, NRS 78.105.  The foregoing discussion does not cover NRS 78.105.

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