No Peeking: Addressing Pretextual Inspection Demands by Competitor-Affiliated Shareholders

Abstract

This article exposes how Delaware private companies are vulnerable to pretextual inspections under the guise of valuation by shareholders who are affiliated with competitors of the companies. The Delaware Court of Chancery’s 2020 decision in Woods v. Sahara Enterprises, Inc., which deviated from established law by switching the initial burden of proof of the shareholder’s motive to the target company, exacerbated this vulnerability. This article argues for reversing that decision and proposes changes in multiple areas of law to help companies fend off prying competitors who abuse statutory shareholder inspection rights for unfair advantages in competition.

Keywords: pretextual inspections, valuation, shareholders inspections Delaware Court of Chancery, Woods v. Sahara Enterprises Inc., inspection rights, unfair competition

JEL Classification: K2, K22