A Landmark Ruling: Delaware Court of Chancery Allows Post-Demand Evidence in Section 220 Litigation
On January 29, 2025, Vice Chancellor Laster of the Delaware Court of Chancery issued a key ruling regarding the use of post-demand evidence in Section 220 litigation.
03.06.25
The case involved a stockholder who sued after its books and records inspection demand was rejected by Paramount Global, the target company (the Company). To establish a proper purpose for the demand, the stockholder sought to use post-demand news reports citing anonymous sources. The Company argued that such evidence, which arose after the demand and used anonymous sources, should not be considered. After the stockholder took exceptions to the magistrate judge’s favorable recommendation for the Company, the Vice Chancellor conducted a de novo review of both the facts and the law, ultimately ruling in favor of the stockholder. [1]
While recognizing the general rule that stockholders are usually limited to evidence available at the time of the demand, the court conducted a statutory analysis and determined that Section 220 permits the use of post-demand evidence in certain circumstances. Specifically, the court noted that Section 220 does not require a stockholder to cite evidence in the demand itself, allowing for a brief demand, followed by discovery and the submission of evidence at trial. While it makes sense to bar a party from introducing evidence it could have obtained before filing a Section 220 lawsuit through reasonable diligence, the argument for exclusion is less justifiable if the evidence relates to pre-demand events that could not have been discovered earlier through reasonable diligence. Although the law could require the stockholder to make a new demand, doing so could be inefficient if litigation is already underway. The court ruled that, in this case, the relevant events occurred post-demand, and the stockholder could not have obtained the evidence prior to the demand. Furthermore, because the post-demand evidence relates to the Company’s own conduct, the Company cannot claim surprise, and allowing the stockholder to present this evidence at trial would not be prejudicial. The court also noted that excluding the evidence and requiring a new demand would be wasteful.
The court also addressed whether news articles relying on anonymous sources could be used as evidence. The Company argued that these were unreliable hearsay, but the court ruled that hearsay can be used in Section 220 litigation if it is deemed trustworthy. In this instance, the court found that the articles, even using anonymous sources, were from reputable publications like The New York Times, were detailed, and were written by experienced journalists, making them sufficiently reliable for consideration.
Ultimately, the court ruled that the stockholder had established a credible basis for its inspection demand, and the post-demand news articles, including those with anonymous sources, were admissible evidence in support of its claim.
Key Takeaways:
- In Section 220 litigation, post-demand evidence can be considered under certain circumstances, such as when a material event occurs after demand but before trial, provided it does not unfairly prejudice the corporation.
- Hearsay can be considered in Section 220 cases if it meets the standard of trustworthiness.
- News articles relying on anonymous sources should not be automatically excluded in Section 220 litigation; their admissibility should be assessed on a case-by-case basis.
Co-authors Richard M. Beck, partner, and Caixia Su, associate, are members of the Delaware Litigation Group at Klehr Harrison.
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[1] State of Rhode Island Office of the General Treasurer, on Behalf of the Employees’ Retirement System of Rhode Island v. Paramount Global, C.A. No. 2024-0457-SEM, D.I. 67 (Del. Ch. Jan 29, 2025, V.C. Laster)