## Facts

- Stockholders of CNET Networks, Inc. sought to investigate suspected misconduct involving stock-option backdating.
- CNET publicly acknowledged that it had engaged in stock-option backdating from its 1996 IPO through at least 2003 and disclosed federal criminal and SEC investigations.
- The stockholders filed a federal derivative action that was dismissed for failure to plead demand futility under Fed. R. Civ. P. 23.1, with leave to amend.
- The federal court stayed proceedings to allow the stockholders to pursue a Delaware books-and-records demand to obtain information needed to replead demand futility.
- The stockholders served a demand under 8 Del. C. § 220 seeking inspection of CNET’s books and records concerning option grants and backdating.
- CNET resisted production; on the eve of trial it agreed to produce some materials, but the parties disputed whether inspection could include documents concerning option grants occurring before the stockholders acquired their shares.
- The stockholders asserted their purpose was to gather particularized facts to plead demand futility, including facts supporting an oversight-failure theory that required understanding long-running board-level practices.

## Issues

1. Whether stockholders pursuing a proper § 220 purpose of obtaining facts to plead demand futility may inspect books and records concerning corporate acts that occurred before they became stockholders.
2. How contemporaneous-ownership and derivative-standing limits relate to the permissible temporal scope of inspection under § 220.
3. Whether the requested pre-ownership materials were reasonably related to the stated investigatory purpose rather than an attempt to investigate claims the stockholders lacked standing to assert.

## Decision

- The Court of Chancery granted inspection in part.
- The court held that stockholders may obtain certain books and records predating their share ownership when those materials are reasonably related to a proper purpose—here, obtaining particularized facts to plead demand futility.
- The court rejected a categorical rule limiting § 220 inspection to the period of the stockholders’ ownership.
- The court limited inspection to materials tied to the proper purpose, rather than allowing an unlimited historical production.

## Legal Principles

- A stockholder seeking inspection under 8 Del. C. § 220 must show a proper purpose reasonably related to the stockholder’s interests.
- The scope (including time period) of a § 220 inspection is governed by a reasonableness standard; inspection extends only to documents reasonably related to the stated purpose.
- The right to inspect under § 220 is distinct from the ultimate question of derivative standing or the merits; inspection may include earlier-period documents if they are needed to plead demand futility for claims the stockholder can pursue.
- Where alleged wrongdoing is admitted or otherwise supported by a credible basis, § 220 may be used to obtain targeted materials to plead demand futility, including materials bearing on board knowledge, decision-making, and oversight.

## Conclusion

The Court of Chancery allowed a targeted § 220 inspection reaching certain pre-ownership records because the stockholders sought particularized facts to plead demand futility, and the temporal scope of inspection turned on reasonable relation to that proper purpose rather than a categorical ownership-period limit.


Melzer v. CNET Networks, Inc., 934 A.2d 912 (Del. Ch. 2007)