Books & Records: Courts May Consider Post-Demand Evidence in “Credible Basis” Assessment

Key Takeaways

• Delaware Supreme Court permits post‑demand evidence in credible‑basis test
• Anonymous news sources may satisfy reliability if fact‑specific analysis
• Courts retain discretion; evidence must not prejudice corporation
• Dissents warn against expanding Section 220 litigation scope
• Stockholders must document evidence timing for future demands

Pulse Analysis

The Delaware Supreme Court’s recent opinion reshapes the landscape of Section 220 derivative litigation by carving out an exception to the long‑standing rule that only evidence existing at the time of the demand may be considered. Historically, courts have limited shareholders to pre‑demand facts to prevent fishing expeditions and protect corporate confidentiality. By allowing post‑demand material—provided it is material and non‑prejudicial—the court acknowledges that wrongdoing often unfolds after a demand is made, and that shareholders should not be penalized for discovering new facts later. This nuanced approach balances the need for corporate protection with the pursuit of legitimate oversight.

Practically, the ruling encourages shareholders and their counsel to monitor ongoing developments, such as media reports and whistleblower disclosures, even after a demand is filed. However, the decision also imposes a heightened duty to assess the reliability of anonymous sources on a fact‑specific basis, rather than relying solely on a publication’s reputation. Boards should anticipate that courts will scrutinize the provenance of such evidence, potentially prompting more rigorous internal investigations and documentation practices to pre‑empt claims that rely on hearsay.

The dissent underscores a strategic tension: expanding evidentiary scope may invite a surge in Section 220 actions, increasing litigation costs for corporations. Companies are likely to respond by tightening demand‑letter protocols and preserving contemporaneous records to demonstrate that any post‑demand evidence was unavailable at the time of the request. Legal advisors should advise clients to maintain detailed logs of information flow and to be prepared to argue both the materiality and non‑prejudicial nature of any new evidence. As courts continue to refine the credible‑basis inquiry, the decision sets a precedent that could influence future Delaware jurisprudence on shareholder activism and corporate governance.