## Facts

- McKesson Corporation agreed to a stock-for-stock merger with HBO & Company (HBOC) in October 1998; Noel Saito bought McKesson stock shortly after.
- The merger closed in January 1999; the combined entity became McKesson HBOC, Inc., and HBOC remained a wholly owned subsidiary.
- In 1999, the company announced significant financial restatements attributed to HBOC accounting irregularities.
- Stockholders filed derivative litigation alleging directors failed to detect accounting problems before the merger and wasted corporate assets by entering the transaction.
- After the derivative action was dismissed without prejudice, Saito made a demand under 8 Del. C. § 220 to inspect books and records to investigate possible fiduciary breaches and to supplement the derivative pleading.
- Saito sought documents including pre-merger due diligence materials (including Arthur Andersen’s work), communications among the companies and their advisors about accounting practices, and board-level materials concerning the merger and HBOC’s financial condition.
- The Court of Chancery found Saito had a proper purpose but limited inspection to post-stock-purchase wrongdoing, excluded third-party-prepared documents even if held by the company, and denied inspection of HBOC’s own books and records (except items actually provided to the parent).
- Saito took an interlocutory appeal.

## Issues

1. Whether § 220 inspection may include documents predating the stockholder’s share purchase when the subject matter is reasonably related to the stockholder’s interests.
2. Whether § 220 permits inspection of documents prepared by third parties (e.g., accountants, investment bankers) that are in the corporation’s possession, custody, or control and necessary to the stated proper purpose.
3. Whether a stockholder of a parent corporation may inspect a subsidiary’s books and records absent fraud or alter-ego circumstances, and how § 220 applies to subsidiary documents held by the parent.

## Decision

- The Delaware Supreme Court affirmed in part, reversed in part, and remanded.
- The court rejected using the stock purchase date as an automatic cutoff for § 220 inspection; pre-purchase records may be inspected if reasonably related to the stockholder’s interests and necessary to the proper purpose.
- The court reversed the categorical exclusion of third-party-prepared documents; authorship is not dispositive if the documents are in the corporation’s possession, custody, or control and necessary to the proper purpose.
- The court affirmed the denial of direct inspection of the subsidiary’s standalone books and records absent a showing of fraud or alter-ego status.
- The court held that subsidiary documents provided to and held by the parent (or the combined company) may be inspected to the extent they are in the parent’s possession, custody, or control and necessary to the proper purpose.
- The case was remanded for the Court of Chancery to retarget the production consistent with these standards and § 220’s requirement of tailored inspection.

## Legal Principles

- A stockholder with a proper purpose under 8 Del. C. § 220 is entitled to inspect documents in the corporation’s possession, custody, or control that are necessary to accomplish that purpose.
- A stockholder’s § 220 inspection rights are not automatically limited to the period after the stockholder acquired shares; pre-acquisition documents may be required to understand alleged wrongdoing that affects the stockholder’s interests.
- The fact that documents were prepared by third parties does not, by itself, exclude them from inspection if they are held by the corporation and are necessary to the proper purpose.
- Section 220 is a limited, purpose-driven inspection remedy and does not provide the wide-ranging discovery available in litigation; inspection must be tailored to what is necessary.
- A parent corporation’s stockholders generally may not inspect a subsidiary’s separate books and records absent fraud or proof that the subsidiary is the parent’s alter ego; however, subsidiary-origin documents held by the parent can be reachable because they function as parent-held records.

## Conclusion

The court held that a properly motivated § 220 demand may reach necessary pre-purchase and third-party-prepared materials in the corporation’s control, while preserving corporate separateness by limiting direct access to a subsidiary’s standalone records absent alter-ego or fraud, and remanded for a narrowed production consistent with those limits.


Saito v. McKesson HBOC, Inc., 806 A.2d 113 (Del. 2002)