By: David Forney and Harsha Garikapati
In MaD Investors GRMD, LLC and MaD Investors GRPA, LLC, v. GR Companies, Inc., C.A. No. 2020-0589-MTZ (Del. Ch. October 28, 2020), the Delaware Court of Chancery (the “Court”) held on an issue of first impression that a Delaware corporation has until midnight on the fifth business day after being served with a Section 220 demand to inspect books and records (a “Demand”) to respond to that Demand.
MaD Investors GRMD, LLC and MaD Investors GRPA, LLC (collectively, the “Plaintiffs”) are stockholders of GR Companies, Inc. (the “Company” or “Defendant”). In July 2020, Plaintiffs sent a Demand to compel inspection of the Company’s books and records. A week later, Plaintiffs filed a Verified Complaint against Defendant (the “Complaint”) with the Court, asking it to compel Defendant to open its books and records for inspection by Plaintiffs. In early August, the Company filed a motion to dismiss (the “Motion to Dismiss”) asserting Plaintiffs failed to comply with the 8 Del. C. § 220 requirement to wait a full five business days after the Company’s receipt of the demand to file suit.
The Court stated that pursuant to Section 220 of the Delaware General Corporation Law (“DGCL”), stockholders may not file an action asking for a court to compel a corporation to disclose until the earlier of (i) lapse of the five-business-day response period or (ii) the date that the corporation affirmatively refuses the demand. Plaintiffs argued that the five-business-day period ended at the “close of business” on the fifth business day after the Demand, and Defendant argued that the five-business-day period ended at midnight on the fifth business day after the Demand. The Court sided with the Defendants and granted the Motion to Dismiss. The Court stated that the expiration of the five-business-day period was not related to rule that the inspection be made during business hours. The court looked to secondary dictionary authorities to conclude that 11:59 p.m. was the appropriate measure of time.
The Court rejected Plaintiffs’ other argument that the Company’s requested extension to respond to the Demand constituted a rejection of the Demand. The Court held that only an affirmative action by a corporation that reflects a denial of the stockholder’s request constitutes a refusal. As examples, the Court stated that failing to respond to a stockholder’s request for a meet-and-confer conference would not constitute a refusal, but filing affirmative litigation seeking to avoid producing the material the stockholder sought would be a refusal. The Court held that a company’s request for an extension to respond is not a denial of a stockholder’s request.