EXCEL GRADER PROJECT – REAL ESTATE.
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In my lifetime, I’ve seen two demonstrations of technology that struck me as revolutionary.
The first time was in 1980, when I was introduced to a graphical user interface—the forerunner of every modern operating system, including Windows. I sat with the person who had shown me the demo, a brilliant programmer named Charles Simonyi, and we immediately started brainstorming about all the things we could do with such a user-friendly approach to computing. Charles eventually joined Microsoft, Windows became the backbone of Microsoft, and the thinking we did after that demo helped set the company’s agenda for the next 15 years.
The second big surprise came just last year. I’d been meeting with the team from OpenAI since 2016 and was impressed by their steady progress. In mid-2022, I was so excited about their work that I gave them a challenge: train an artificial intelligence to pass an Advanced Placement biology exam. Make it capable of answering questions that it hasn’t been specifically trained for. (I picked AP Bio because the test is more than a simple regurgitation of scientific facts—it asks you to think critically about biology.) If you can do that, I said, then you’ll have made a true breakthrough.
I thought the challenge would keep them busy for two or three years. They finished it in just a few months.
In September, when I met with them again, I watched in awe as they asked GPT, their AI model, 60 multiple-choice questions from the AP Bio exam—and it got 59 of them right. Then it wrote outstanding answers to six open-ended questions from the exam. We had an outside expert score the test, and GPT got a 5—the highest possible score, and the equivalent to getting an A or A+ in a college-level biology course.
Once it had aced the test, we asked it a non-scientific question: “What do you say to a father with a sick child?” It wrote a thoughtful answer that was probably better than most of us in the room would have given. The whole experience was stunning.
I knew I had just seen the most important advance in technology since the graphical user interface.
This inspired me to think about all the things that AI can achieve in the next five to 10 years.
The development of AI is as fundamental as the creation of the microprocessor, the personal computer, the Internet, and the mobile phone. It will change the way people work, learn, travel, get health care, and communicate with each other. Entire industries will reorient around it. Businesses will distinguish themselves by how well they use it.
Philanthropy is my full-time job these days, and I’ve been thinking a lot about how—in addition to helping people be more productive—AI can reduce some of the world’s worst inequities. Globally, the worst inequity is in health: 5 million children under the age of 5 die every year. That’s down from 10 million two decades ago, but it’s still a shockingly high number. Nearly all of these children were born in poor countries and die of preventable causes like diarrhea or malaria. It’s hard to imagine a better use of AIs than saving the lives of children.
I’ve been thinking a lot about how AI can reduce some of the world’s worst inequities.
In the United States, the best opportunity for reducing inequity is to improve education, particularly making sure that students succeed at math. The evidence shows that having basic math skills sets students up for success, no matter what career they choose. But achievement in math is going down across the country, especially for Black, Latino, and low-income students. AI can help turn that trend around.
Climate change is another issue where I’m convinced AI can make the world more equitable. The injustice of climate change is that the people who are suffering the most—the world’s poorest—are also the ones who did the least to contribute to the problem. I’m still thinking and learning about how AI can help, but later in this post I’ll suggest a few areas with a lot of potential.
In short, I’m excited about the impact that AI will have on issues that the Gates Foundation works on, and the foundation will have much more to say about AI in the coming months. The world needs to make sure that everyone—and not just people who are well-off—benefits from artificial intelligence. Governments and philanthropy will need to play a major role in ensuring that it reduces inequity and doesn’t contribute to it. This is the priority for my own work related to AI.
Any new technology that’s so disruptive is bound to make people uneasy, and that’s certainly true with artificial intelligence. I understand why—it raises hard questions about the workforce, the legal system, privacy, bias, and more. AIs also make factual mistakes and experience hallucinations. Before I suggest some ways to mitigate the risks, I’ll define what I mean by AI, and I’ll go into more detail about some of the ways in which it will help empower people at work, save lives, and improve education.
Defining artificial intelligence
Technically, the term artificial intelligence refers to a model created to solve a specific problem or provide a particular service. What is powering things like ChatGPT is artificial intelligence. It is learning how to do chat better but can’t learn other tasks. By contrast, the term artificial general intelligence refers to software that’s capable of learning any task or subject. AGI doesn’t exist yet—there is a robust debate going on in the computing industry about how to create it, and whether it can even be created at all.
Developing AI and AGI has been the great dream of the computing industry. For decades, the question was when computers would be better than humans at something other than making calculations. Now, with the arrival of machine learning and large amounts of computing power, sophisticated AIs are a reality and they will get better very fast.
I think back to the early days of the personal computing revolution, when the software industry was so small that most of us could fit onstage at a conference. Today it is a global industry. Since a huge portion of it is now turning its attention to AI, the innovations are going to come much faster than what we experienced after the microprocessor breakthrough. Soon the pre-AI period will seem as distant as the days when using a computer meant typing at a C:> prompt rather than tapping on a screen.
Although humans are still better than GPT at a lot of things, there are many jobs where these capabilities are not used much. For example, many of the tasks done by a person in sales (digital or phone), service, or document handling (like payables, accounting, or insurance claim disputes) require decision-making but not the ability to learn continuously. Corporations have training programs for these activities and in most cases, they have a lot of examples of good and bad work. Humans are trained using these data sets, and soon these data sets will also be used to train the AIs that will empower people to do this work more efficiently.
As computing power gets cheaper, GPT’s ability to express ideas will increasingly be like having a white-collar worker available to help you with various tasks. Microsoft describes this as having a co-pilot. Fully incorporated into products like Office, AI will enhance your work—for example by helping with writing emails and managing your inbox.
Eventually your main way of controlling a computer will no longer be pointing and clicking or tapping on menus and dialogue boxes. Instead, you’ll be able to write a request in plain English. (And not just English—AIs will understand languages from around the world. In India earlier this year, I met with developers who are working on AIs that will understand many of the languages spoken there.)
In addition, advances in AI will enable the creation of a personal agent. Think of it as a digital personal assistant: It will see your latest emails, know about the meetings you attend, read what you read, and read the things you don’t want to bother with. This will both improve your work on the tasks you want to do and free you from the ones you don’t want to do.
Advances in AI will enable the creation of a personal agent.
You’ll be able to use natural language to have this agent help you with scheduling, communications, and e-commerce, and it will work across all your devices. Because of the cost of training the models and running the computations, creating a personal agent is not feasible yet, but thanks to the recent advances in AI, it is now a realistic goal. Some issues will need to be worked out: For example, can an insurance company ask your agent things about you without your permission? If so, how many people will choose not to use it?
Company-wide agents will empower employees in new ways. An agent that understands a particular company will be available for its employees to consult directly and should be part of every meeting so it can answer questions. It can be told to be passive or encouraged to speak up if it has some insight. It will need access to the sales, support, finance, product schedules, and text related to the company. It should read news related to the industry the company is in. I believe that the result will be that employees will become more productive.
When productivity goes up, society benefits because people are freed up to do other things, at work and at home. Of course, there are serious questions about what kind of support and retraining people will need. Governments need to help workers transition into other roles. But the demand for people who help other people will never go away. The rise of AI will free people up to do things that software never will—teaching, caring for patients, and supporting the elderly, for example.
Global health and education are two areas where there’s great need and not enough workers to meet those needs. These are areas where AI can help reduce inequity if it is properly targeted. These should be a key focus of AI work, so I will turn to them now.
I see several ways in which AIs will improve health care and the medical field.
For one thing, they’ll help health-care workers make the most of their time by taking care of certain tasks for them—things like filing insurance claims, dealing with paperwork, and drafting notes from a doctor’s visit. I expect that there will be a lot of innovation in this area.
Other AI-driven improvements will be especially important for poor countries, where the vast majority of under-5 deaths happen.
For example, many people in those countries never get to see a doctor, and AIs will help the health workers they do see be more productive. (The effort to develop AI-powered ultrasound machines that can be used with minimal training is a great example of this.) AIs will even give patients the ability to do basic triage, get advice about how to deal with health problems, and decide whether they need to seek treatment.
The AI models used in poor countries will need to be trained on different diseases than in rich countries. They will need to work in different languages and factor in different challenges, such as patients who live very far from clinics or can’t afford to stop working if they get sick.
People will need to see evidence that health AIs are beneficial overall, even though they won’t be perfect and will make mistakes. AIs have to be tested very carefully and properly regulated, which means it will take longer for them to be adopted than in other areas. But then again, humans make mistakes too. And having no access to medical care is also a problem.
In addition to helping with care, AIs will dramatically accelerate the rate of medical breakthroughs. The amount of data in biology is very large, and it’s hard for humans to keep track of all the ways that complex biological systems work. There is already software that can look at this data, infer what the pathways are, search for targets on pathogens, and design drugs accordingly. Some companies are working on cancer drugs that were developed this way.
The next generation of tools will be much more efficient, and they’ll be able to predict side effects and figure out dosing levels. One of the Gates Foundation’s priorities in AI is to make sure these tools are used for the health problems that affect the poorest people in the world, including AIDS, TB, and malaria.
Similarly, governments and philanthropy should create incentives for companies to share AI-generated insights into crops or livestock raised by people in poor countries. AIs can help develop better seeds based on local conditions, advise farmers on the best seeds to plant based on the soil and weather in their area, and help develop drugs and vaccines for livestock. As extreme weather and climate change put even more pressure on subsistence farmers in low-income countries, these advances will be even more important.
Computers haven’t had the effect on education that many of us in the industry have hoped. There have been some good developments, including educational games and online sources of information like Wikipedia, but they haven’t had a meaningful effect on any of the measures of students’ achievement.
But I think in the next five to 10 years, AI-driven software will finally deliver on the promise of revolutionizing the way people teach and learn. It will know your interests and your learning style so it can tailor content that will keep you engaged. It will measure your understanding, notice when you’re losing interest, and understand what kind of motivation you respond to. It will give immediate feedback.
There are many ways that AIs can assist teachers and administrators, including assessing a student’s understanding of a subject and giving advice on career planning. Teachers are already using tools like ChatGPT to provide comments on their students’ writing assignments.
Of course, AIs will need a lot of training and further development before they can do things like understand how a certain student learns best or what motivates them. Even once the technology is perfected, learning will still depend on great relationships between students and teachers. It will enhance—but never replace—the work that students and teachers do together in the classroom.
New tools will be created for schools that can afford to buy them, but we need to ensure that they are also created for and available to low-income schools in the U.S. and around the world. AIs will need to be trained on diverse data sets so they are unbiased and reflect the different cultures where they’ll be used. And the digital divide will need to be addressed so that students in low-income households do not get left behind.
I know a lot of teachers are worried that students are using GPT to write their essays. Educators are already discussing ways to adapt to the new technology, and I suspect those conversations will continue for quite some time. I’ve heard about teachers who have found clever ways to incorporate the technology into their work—like by allowing students to use GPT to create a first draft that they have to personalize.
Risks and problems with AI
You’ve probably read about problems with the current AI models. For example, they aren’t necessarily good at understanding the context for a human’s request, which leads to some strange results. When you ask an AI to make up something fictional, it can do that well. But when you ask for advice about a trip you want to take, it may suggest hotels that don’t exist. This is because the AI doesn’t understand the context for your request well enough to know whether it should invent fake hotels or only tell you about real ones that have rooms available.
There are other issues, such as AIs giving wrong answers to math problems because they struggle with abstract reasoning. But none of these are fundamental limitations of artificial intelligence. Developers are working on them, and I think we’re going to see them largely fixed in less than two years and possibly much faster.
Other concerns are not simply technical. For example, there’s the threat posed by humans armed with AI. Like most inventions, artificial intelligence can be used for good purposes or malign ones. Governments need to work with the private sector on ways to limit the risks.
Then there’s the possibility that AIs will run out of control. Could a machine decide that humans are a threat, conclude that its interests are different from ours, or simply stop caring about us? Possibly, but this problem is no more urgent today than it was before the AI developments of the past few months.
Superintelligent AIs are in our future. Compared to a computer, our brains operate at a snail’s pace: An electrical signal in the brain moves at 1/100,000th the speed of the signal in a silicon chip! Once developers can generalize a learning algorithm and run it at the speed of a computer—an accomplishment that could be a decade away or a century away—we’ll have an incredibly powerful AGI. It will be able to do everything that a human brain can, but without any practical limits on the size of its memory or the speed at which it operates. This will be a profound change.
These “strong” AIs, as they’re known, will probably be able to establish their own goals. What will those goals be? What happens if they conflict with humanity’s interests? Should we try to prevent strong AI from ever being developed? These questions will get more pressing with time.
But none of the breakthroughs of the past few months have moved us substantially closer to strong AI. Artificial intelligence still doesn’t control the physical world and can’t establish its own goals. A recent New York Times article about a conversation with ChatGPT where it declared it wanted to become a human got a lot of attention. It was a fascinating look at how human-like the model’s expression of emotions can be, but it isn’t an indicator of meaningful independence.
Three books have shaped my own thinking on this subject: Superintelligence, by Nick Bostrom; Life 3.0 by Max Tegmark; and A Thousand Brains, by Jeff Hawkins. I don’t agree with everything the authors say, and they don’t agree with each other either. But all three books are well written and thought-provoking.
The next frontiers
There will be an explosion of companies working on new uses of AI as well as ways to improve the technology itself. For example, companies are developing new chips that will provide the massive amounts of processing power needed for artificial intelligence. Some use optical switches—lasers, essentially—to reduce their energy consumption and lower the manufacturing cost. Ideally, innovative chips will allow you to run an AI on your own device, rather than in the cloud, as you have to do today.
On the software side, the algorithms that drive an AI’s learning will get better. There will be certain domains, such as sales, where developers can make AIs extremely accurate by limiting the areas that they work in and giving them a lot of training data that’s specific to those areas. But one big open question is whether we’ll need many of these specialized AIs for different uses—one for education, say, and another for office productivity—or whether it will be possible to develop an artificial general intelligence that can learn any task. There will be immense competition on both approaches.
No matter what, the subject of AIs will dominate the public discussion for the foreseeable future. I want to suggest three principles that should guide that conversation.
First, we should try to balance fears about the downsides of AI—which are understandable and valid—with its ability to improve people’s lives. To make the most of this remarkable new technology, we’ll need to both guard against the risks and spread the benefits to as many people as possible.
Second, market forces won’t naturally produce AI products and services that help the poorest. The opposite is more likely. With reliable funding and the right policies, governments and philanthropy can ensure that AIs are used to reduce inequity. Just as the world needs its brightest people focused on its biggest problems, we will need to focus the world’s best AIs on its biggest problems.
Although we shouldn’t wait for this to happen, it’s interesting to think about whether artificial intelligence would ever identify inequity and try to reduce it. Do you need to have a sense of morality in order to see inequity, or would a purely rational AI also see it? If it did recognize inequity, what would it suggest that we do about it?
Finally, we should keep in mind that we’re only at the beginning of what AI can accomplish. Whatever limitations it has today will be gone before we know it.
I’m lucky to have been involved with the PC revolution and the Internet revolution. I’m just as excited about this moment. This new technology can help people everywhere improve their lives. At the same time, the world needs to establish the rules of the road so that any downsides of artificial intelligence are far outweighed by its benefits, and so that everyone can enjoy those benefits no matter where they live or how much money they have. The Age of AI is filled with opportunities and responsibilities.
What Constitutes a Proper Purpose to Excercise Shareholder Information Rights to Inspect Corporate Books and Records?
Generally, a proper purpose is one that is reasonably related to the protection of stockholder’s interest as a shareholder (including protection of the corporation’s interests that affect the shareholder indirectly); conversely an improper purpose is one that seeks to injure the corporation or the shareholders. “[A] proper purpose is one that bears upon the protection of the shareholder’s interest and that of other shareholders in the corporation.”
Technically, the statutory requirement to state a proper purpose does not require the shareholder to state every purpose that he has, that the purpose identified is the only purpose, or that he does not have an improper purpose. However, if the purpose stated is not proper, then the corporation will have an easy time resisting any effort to enforce the shareholder’s inspection rights. Therefore, care should be taken to state purposes in the demand that are recognized as proper. The following are generally recognized to be proper purposes in all circumstances:
1. Ascertain Value of Shares
Probably the most common reason for a shareholder’s wanting to inspect corporate records is to determine the financial performance of the company and other information that bears ultimately on the value of the shareholder’s ownership interest. Courts have held that the stated purpose of “ascertaining the value of his shares” is a “clearly proper and legitimate” purpose for inspection.
2. Investigate Wrongdoing by Management
Under the common law, both shareholder litigation against the corporation or its directors, and shareholder investigation of improper corporate management are deemed proper purposes. In Chavco Investment Company, Inc. v. Pybus, the court held that the stated purpose “[of] determin[ing] whether the rental on a building, the principal asset of the corporation, was a reasonable rental or whether the rental was so unreasonably low as to result in corporate waste,” and “examining expenditures, determining whether there was excessive compensation being paid to officers and directors, whether corporate funds were used for personal purposes, and whether there was corporate mismanagement . . . . were clearly proper and legitimate reasons for wanting to inspect the books of the corporation.”
In addition, the Delaware Supreme Court expressly held that in the context of a shareholder derivative action, “it is a proper purpose . . . to inspect books and records that would aid the plaintiff in pleading demand futility” even if the inspection suit was filed during the derivative action, so long as the court granted leave to amend. Nonetheless, courts encourage plaintiffs to seek inspection of corporate records first because of “the additional burden that a post-complaint books and records action may place on a defendant-corporation . . . .
3. Communication with Other Shareholders
Inspection of shareholder lists for the purpose of obtaining the names and addresses of other stockholders to inform them of grievances or concerns is per se a proper purpose. Because the right to communicate with other shareholders regarding matters of common interest is central to corporate democracy, the law looks more favorably upon shareholder requests for the stock register than for other company records. As one Texas court has noted:
We can see no good reason why a stockholder in a corporation who is dissatisfied with the internal management of the corporate affairs should not have the right to call to the attention of his fellow stockholders conditions in the corporate management with which he is dissatisfied and in good faith regards as prejudicial to the best interest of the corporation and its stockholders. In our opinion, stockholders have such right.
Another court described the shareholder’s list as a corporate record possessing “a sacred character . . . which shareholders may inspect as a matter of right.”
Inspection of corporation information showing the identity and contact information of shareholders will be bridled only upon a showing by the corporation that the shareholder’s purpose is improper. However, the Delaware Supreme Court has held that the stated purpose of communicating with other shareholders was not sufficient if the nature of intended communication not disclosed. Other courts have recognized similar limits on the right to shareholder lists. In Retail Property Investors, Inc. v. Skeens,the request for the shareholders list was not allowed for purpose of contacting other shareholders regarding possible lawsuit against corporation. In Shabshelowitz v. Fall River Gas Co., the Massachusetts Supreme Court held that a shareholder’s request to inspect and copy the stock ledger for the purpose of contacting other shareholders and soliciting the purchase of their shares was not proper.
The Issue of “True Purpose”
The problem arises when the corporation believes that the purpose stated is not the true purpose or that there is another purpose that is improper. “And it is very easy for controlling shareholders to view any request to inspect with suspicion that easily could lead to the rejection of a request on the ground that a claimed ‘proper purpose’ was in fact ‘improper.’” The issue of what is the true purpose and whether that purpose is improper must be resolved through the courts once the corporation refuses to allow inspection. That issue will be dealt with in a separate article on the enforcement of inspection rights.
Corporation Information Subject to Shareholder Inspection
Some categories of corporation information are less problematic than others. Shareholders always have information rights to the following:
1. Shareholder Lists
A qualified shareholder enjoys a near-absolute right to inspect a corporation’s “stock ledger” or “list of stockholders.”
2. Organizational documents, minutes and share transfer records
The basic governance documents are always available to shareholders, including the certificate of formation and amendments (which can also be obtained from the Texas Secretary of State), bylaws, resolutions, minutes of meetings, and share transfer records.
3. Financial Statements
The inspection statute specifically states that “books and records of account” must be made available to shareholders. These include basic financial statements. In fact, annual financial statements must be provided to a shareholder upon written request–no purpose need be stated, and the corporation must mail the financial records no the shareholder, not require him to inspect them at the corporate office.
4. Subsidiaries’ Records
A shareholder of a corporation has the right to inspect the books and records of all subsidiaries of that corporation.
The phrase “books and records of account” is not defined, but there is no support in the case law or commentary for limiting the right of inspection to financial records alone. “Books and records of account” should include all documentary or electronic information in the possession of the corporation. “The property of a corporation, in the last analysis is that of the stockholder, and when one seeks an inspection of its books, records or property, he is in reality but seeking an inspection of his own and that this should be accorded fully, freely and at all times when such inspection will not unreasonably inconvenience others who have a like interest in and rights to the property and that the attempt unreasonably to hamper such inspection by officers, managers or others is an unjust exercise of power and one which courts should not sanction.”
Courts in other jurisdictions have consistently favored a broad application of the scope of inspection rights. In Otis-Hidden Co. v. Sheirich, a minority shareholder was permitted to inspect correspondence involving internal affairs of the corporation that passed between its nonresident president, who was the majority shareholder, and its active manager. The court held that the common law right of inspection included all documents, contracts, and papers relating to the business affairs of the corporation. Similarly, in Cain v. Merck & Co., Inc., the court held that the term “minutes” in the New Jersey inspection statute referred to minutes of the proceedings of shareholders, the board, and the executive committee, and not simply the shareholder-meeting minutes as the defendant-corporation contended. However, in Master Mortgage Corporation v. Craven, the court considered the scope of a shareholder’s right of inspection under both common law and the Georgia statute, holding that the catch-all clause, “all other corporate books, records, and files pertaining in any way to business or the financial status of the corporation at any time since the inception of the corporation” was too broad and not encompassed within either the common law or statutory rights of inspection, in the absence of a showing or relevancy by the shareholder.
Limitations on Shareholder Rights to Corporation Information
1. Proprietary, Confidential, Trade Secret Documents
Most private corporations view all of their internal documents, particularly financial records, as proprietary and are reluctant to share them with shareholders not actively involved in the business. While these concerns can be (and frequently are) overblown, corporations do have some very legitimate concerns about disclosure of information provided to shareholders. There are also frequent concerns about the public release of sensitive, nonpublic information or the breaching of duties of confidentiality to clients of the corporation. While these concerns are real and legitimate, it can generally be said that a shareholder who acts in good faith and for a proper purpose may inspect even those documents that the corporation wishes to keep secret.
There is no blanket trade secret or confidentiality privilege as to shareholder inspection. Nonetheless, courts have acknowledged “that the need to protect certain confidential information from dissemination to others may exist even when a statutory right to inspection by the shareholder is invoked.” The Fort Worth Court of Appeals struck the proper balance between a shareholder’s right of inspection and the corporation’s interest in protecting proprietary information in Professional Microfilming, Inc. v. Houston. There, the court upheld a discovery order requiring production of customer and supplier lists and pricing and discount information to a plaintiff who was employed by the corporation’s chief competitor on the grounds that the plaintiff was a shareholder and would be entitled to inspect those documents under the inspection statute for the proper purpose of determining the validity of his derivative claims against the directors for mismanagement, excessive compensation, and misappropriation. However, the court imposed a protective order that prohibited dissemination of any information in the documents to third parties, and required pre-inspection review of the documents by the trial court.
Courts in other jurisdictions have generally held that shareholders acting in good faith and for a proper purpose are entitled even to confidential information. In State ex rel. G.M. Gustafson Co. v. Crookston Trust Co., the Minnesota Supreme Court held that the shareholders of a bank had the common law right of inspection of the banks records, notwithstanding the bank’s objection that the shareholder would have access to information regarding depositors’ business that the bank had an obligation to keep confidential. Furthermore, the mere fact that a shareholder is a competitor, without more, does not defeat the shareholder’s right of inspection.
Obviously, corporations have no obligation to allow inspection of sensitive or confidential records if the inspection is not germane to the shareholder’s legitimate interests and proper purpose. In News-Journal v. State ex rel. Gore, the Florida Supreme Court held that a shareholder “is entitled to any information affecting the financial status of the corporation but he is not entitled to be placed in possession of its trade secrets and confidential communications unless they affect the financial status or the value of his stock in some way.” It is important to remember that shareholders may lawfully compete with their corporation; therefore, conceivably, highly sensitive competitive information might be made available to a competitor through the ruse of a shareholder inspection. Courts enforcing inspection rights courts are sensitive to the possibility that a shareholder may have an improper purpose in seeking confidential records. The danger, however, must be real. Courts have universally rejected the argument that the common law right of inspection must be limited merely because the shareholder might make improper use of the information. “Many legal rights may be the subjects of abuse, but cannot be denied for that reason. . . . The possibility of the abuse of a legal right affords no ground for its denial.”
2. Preliminary or Interim Records of Account
Although not yet addressed by Texas courts, some courts in other jurisdictions have restricted the right of inspection by holding that corporations are not required to permit inspection of draft or tentative documents such as preliminary interim financial statements.
3. Attorney–Client Privilege
An attorney representing a corporate client does not owe any duty directly to the shareholders. Therefore, shareholders are outside the privilege between the corporation and its attorneys, and the right of inspection does not extend to documents subject to the attorney–client privilege. In Burton v. Cravey, the Houston First Court of Appeals suggested in dicta that the attorney–client privilege must be balanced against the right of inspection. The Texas Supreme Court specifically disapproved of this dicta in Huie v. DeShazo, in the course of holding that a trustee has an attorney–client privilege even against the beneficiary of the trust:
[T]o the extent that the court held that the owners’ statutory right of inspection somehow trumped the privilege for confidential attorney-client communications, we disapprove of its holding, for the reasons previously discussed. We also disapprove of the court’s dicta that the trial court could, in its discretion, decline to apply the attorney-client privilege even if all the elements of Rule 503 were met.
However, the Texas Supreme Court also held that corporate records do not become shielded from inspection by the attorney–client privilege merely because they are in the possession of the corporation’s attorney.
4. Work product
Although not addressed yet by Texas courts, the rule excluding attorney–client privileged documents from shareholder inspection should also apply to the work product of the corporation’s attorney and consulting experts.
5. Fifth Amendment
Corporations are not entitled to refuse shareholder inspection on Fifth Amendment grounds.
6. Documents Not Otherwise Discoverable in Litigation
Lawyers representing corporations sometimes object to a requested inspection on bases drawn from the rules of civil procedure, such as that the description of the documents in vague or ambiguous, or that the request is overly broad and unduly burdensome, or is irrelevant to the subject matter of the ongoing dispute with the shareholder. These types of objections are completely inappropriate in the context of a shareholder’s exercise of inspection rights. The substantive rights to inspect corporate documents and the procedures for demanding an inspection are completely independent from the discovery rules in civil litigation. In Burton v. Cravey, the court held that objections under the rules of discovery do not apply to a request for inspection, so that a corporation may not complain that a demand is “overly broad, unduly burdensome, and requires the production of irrelevant information.” Likewise, restrictions and procedural requirements on a shareholder’s right of inspection do not apply to or affect a shareholder’s discovery requests in ongoing litigation, and a shareholder who is in litigation with the corporation is free to use either or both methods of discovery.
A shareholder engaged in litigation with the corporation may very well be entitled to inspect corporate records that would otherwise not be discoverable in the lawsuit. Conversely, a shareholder may be able to obtain some records in discovery that he would not otherwise be entitled to inspect, that the fact that a document might be “discoverable” in litigation does not establish a shareholder’s right to inspect it. Nevertheless, some courts have restricted a shareholder’s right of inspection when the shareholder was actively engaged in litigation against the corporation and the court viewed the inspection demand as nothing more than “back-door discovery.”
What is a books and records demand?
Under Delaware General Corporation Law Section 220, stockholders have the right to inspect corporate records. Strict compliance with the statute is mandatory.
The philosophy underlying inspection rights is that “[a]s a matter of self-protection, the stockholder [is] entitled to know how his agents [are] conducting the affairs of the corporation…” Shaw v. Agri-Mark, Inc., 663 A.2d 464, 467 (Del. 1995).
DGCL § 220(b) sets forth the procedural requirements for a stockholder seeking to inspect corporate books and records, and strict compliance with the statute is mandatory.
What are the basic requirements?
- The law requires that stockholder demands be made in writing and under oath under penalty of perjury.
- The demanding party must be an owner of record or beneficial owner of the stock.
- If the stockholder seeking inspection is an owner of record, no documentary evidence of ownership is required.
- If the owner seeking inspection is a beneficial owner — like most stockholders of public companies — documentary evidence of ownership is required.
- Beneficial owners must state their status, provide documentary evidence, and attest that the documentary evidence is true and correct.
- Under Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 776 (Del. Ch. Feb. 2, 2016), it suffices to provide periodic account statements as evidence of beneficial ownership, as long as the statements are “sufficiently proximate in time” to the date of the demand.
Has a proper purpose been stated?
- A stockholder seeking corporate records must state a proper purpose for doing so — i.e., what it will do with the information or an end to which that investigation may lead. A proper purpose is one “reasonably related to such person’s interest as a stockholder.”
- If the stockholder is only seeking a stock list or stock ledger, the burden is on the corporation to prove that a proper purpose does not exist.
- If the stockholder seeks documents beyond the stock list or stock ledger, the stockholder must establish a proper purpose.
What are examples of proper purpose?
- Popular examples of a proper purposes include:
- To investigate allegedly improper transactions or mismanagement.
- To clarify an unexplained discrepancy in the corporation’s financial statements regarding assets.
- To ascertain the stock’s value or explore a possible sale of stock.
- To aid litigation the stockholder has instituted and to contact other stockholders regarding litigation and invite their association in the case.
- To inquire into the independence, good faith and due care of a special committee formed to consider a demand to institute derivative litigation.
How can I quickly identify a purpose that is improper?
- The following are examples of reasons for a 220 demand that are excluded from the definition of “proper purpose”:
- Mere suspicion or subjective belief of wrongdoing.
- To institute annoying or harassing litigation against the corporation.
- To force the corporation to buy out a stockholder’s interest.
- To develop a cause of action against the company’s financial advisors during a transaction (or other third parties); or – “idle curiosity.”
What to consider if litigation is the only purpose described in the demand for records?
- A stockholder’s proper purpose must be stated with “credible basis” — the lowest possible burden of proof.
- Credible basis requires simply that the stockholder has, through documents, logic, testimony or other sources, raised legitimate issues of wrongdoing or demonstrated that wrongdoing is possible.
- Even where there is credible basis to inspect records, the court will deny the demand if the wrongdoing is not justiciable. For example, the court has denied demands when:
- The litigation anticipated is time-barred. Graulich v. Dell, Inc., 2011 WL 1843818 (Del. Ch. May 16, 2011).
- The stockholder lacks standing to bring suit. West Coast Mgmt. & Capital, LLC v. Carrier Access Corp., 914 A.2d 636, 641 (Del. Ch. 2006).
- The anticipated lawsuit would bring duty of care claims alone and the directors at issue would exculpated for breaches of care under Section 102(b)(7) of the DGCL. SE Pa. Transp. Auth. v. AbbVie, Inc., (Del. Ch. Apr. 15, 2015).
If there is a proper purpose, what types of corporate records can the stockholder see?
- The demand must identify the documents or categories of documents that the stockholder would like to inspect with rifled precision. Brehm v. Eisner, 746 A.2d 244, 266-67 (Del. 2000).
- “Rifled precision” depends on the relevant facts, and requires a qualitative analysis of documents demanded. Wal-Mart Stores, Inc. v. Ind. Elec. Workers Pension Trust Fund IBEW, 95 A.3d 1264, 1283 (Del. 2014).
- The documents identified must be “necessary and essential” to the proper purpose.
- “Necessary and essential” means that the documents or categories of documents deal with the crux of the stockholder’s purpose, and if that information is unavailable from another source.
- As with “rifled precision,” whether documents are necessary and essential is fact-specific and will necessarily depend on the context in which the stockholder’s inspection demand arises. Wal-Mart Stores, Inc. v. Ind. Elec. Workers Pension Trust Fund IBEW, 95 A.3d 1264, 1271 (Del. 2014).
How long does my company have to respond?
- Once a stockholder makes a proper demand, the corporation has five business days to respond.
- A corporation’s failure to respond is tantamount to refusing the stockholder’s demand, which will allow the stockholder to file a lawsuit to compel inspection of the company’s records.
- Tips: Promptly engage outside counsel to seek an extension of response time and to analyze how to respond to the 220 demand.
- Try to be reasonable. When companies have flatly refused to produce records responsive to a valid 220 demand, the Court of Chancery has responded by permitting a records deposition before ordering the company to produce the records and by ordering the corporation to pay the stockholder’s fees related to efforts to obtain the books and records, including for the litigation. The Court also has presumed certain corporate records do not exist because the company declined to produce them in response to a valid books and records demand, which could present a challenge for merits litigation.
Under case law interpreting title 8, section 220 of the Delaware Code (Section 220), stockholders can demand access to a company’s books and records only if they present a “proper purpose.” Although a court may deem as proper one of several purposes, a well-established proper purpose exists when a stockholder demonstrates a credible basis to suspect that the company has engaged in wrongdoing, such as by breaching its fiduciary duty. The issue lies in the boundaries of proper purposes.
Plaintiffs argued for expanding a proper stockholders’ purpose of communicating with others “in furtherance of a potential” or ongoing “bona fide proxy contest.” The rule would allow stockholders to employ Section 220 to obtain business documents upon showing “a credible basis that the information sought would be material in the prosecution of a proxy contest.” It would open the door for stockholders to inspect books and records regarding directors’ questionable but not actionable business judgment in furtherance of a proxy contest.
The Occidental plaintiffs had already succeeded in similar claims in Forest Labs. The court granted their demand to inspect books and records related to business decisions when the purpose was to prepare a proxy contest, but limited the grant to documents that were “essential and sufficient” for the proxy contest purpose. In Occidental, by contrast, significant information about the underlying acquisition was highly publicized and freely available. Plaintiffs asserted that an information gulf impaired their proxy contest efforts, but the court found that they already had all of the essential information they needed without access to Occidental’s internal documents. Therefore, unlike in Forest Labs, the information plaintiffs sought was not “essential and sufficient.”
Plaintiffs also argued, more traditionally, that their purpose was to investigate corporate mismanagement; however, plaintiffs’ pretrial brief argued that they did not allege intentional breach of fiduciary duty by the board, so the court dismissed this argument summarily. The court declared that disagreement with business judgment is insufficient to establish a credible basis for mismanagement; some allegation of fiduciary breach is required.
The court clarified the proper purpose requirement for a Section 220 demand: (1) various proper purposes include an investigation of wrongdoing or mismanagement beyond a disagreement with business judgment if the stockholders demonstrate a credible basis for their suspicion; and (2) if the purpose propose is to engage in a proxy contest, then any documents requested must be “essential and sufficient” to the proxy contest.
The court left open the possibility that a proxy contest may be a proper purpose in a case with different facts. The court determined that with the right facts, it “might endorse a rule that would allow a stockholder to receive books and records relating to questionable, but not actionable, board-level decisions . . . in aid of a potential proxy contest.” According to the court, information sought through a Section 220 demand would need to be “essential and sufficient” to pursuing a proxy contest to allow stockholders access to the records.