Posts in Books and Records

Court of Chancery Explains Interaction with PSLRA

Beiser v. PMC-Sierra Inc., C.A. 3893-VCL (Del. Ch. Feb. 26, 2009)

 

Under the federal PSLRA, discovery may be stayed while a motion to dismiss is pending. Parties have tried to get around this stay by filling a books and records complaint in the Court of Chancery. This decision explains when you can get away with that, and holds, not very often.

 

Briefly, a books and records action may only proceed when the plaintiff is not already involved in a federal case over the same issues, when the plaintiff's attorney is also not involved in a pending federal case, and where the plaintiff agrees not to use the materials produced in the Delaware case to prosecute a pending federal case.

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Court of Chancery Denies Redundant Inspection

Norfolk Country Retirement System v. Jos. A. Bank Clothiers, Inc., C.A. 3443-VCP (Del. Ch. Feb. 12, 2009)

 

Repeated books and records demands by different stockholders should be viewed favorably. When, as here, a special litigation committee (SLC) has reviewed the conduct sought to be investigated by the plaintiff, and the independence and diligence of the SLC cannot be fairly questioned, then a stockholder who demands inspection may receive the SLC report and some backup materials, but no more absent a stronger showing of real justification to think the SLC did not do its job.

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Court of Chancery Upholds Corporate Documentation

Tanyous v. Happy Child World, Inc., C.A. 2947-VCN (Del. Ch. July 18, 2008)

This decision holds that when the corporate internal documents say the plaintiff is a stockholder, an alleged oral agreement that he was really just a lender with the stock as security is not to be believed. What is striking about this case is the extraordinary patience the Court gave to what seems to be a pretty far-fetched story that documents do not mean what they say.

The plaintiff contended that he was a stockholder entitled to inspection rights. The defense was that despite all the corporate documentation, including tax returns, that said the plaintiff was a stockholder, there really was a side deal that he was only a lender with a security interest in stock. Not surprisingly, that story did not wash.

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Court of Chancery Confirms Limits of Inspection Litigation

TravelCenters of America LLC v. Brog, C.A. 3516-CC (Del. Ch. March 31, 2008)

This decision confirms that for limited liability companies the rule applies from corporate law that a suit for inspection of books and records is a limited case that may not also include other claims such as breach of fiduciary duty.

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Court of Chancery Extends Books And Records Inspection

Melzer v. CNET Networks, Inc., C.A. No. 3023-CC (November 21, 2007).

The scope of inspection rights may be affected by when a stockholder first acquired her stock. If the inspection is to investigate alleged wrongdoing, the rationale for granting inspection is to permit the filing of a derivative suit if the inspection shows that it is warranted. Hence, prior case law has held that inspection of records existing before the petitioner became a stockholder is not warranted because the stockholder has no right to sue for those pre-ownership wrongs under Delaware law.

This decision extends inspection rights when the potential claim is for a Caremark case alleging a "sustained or systematic failure" of oversight. Then, the Court held, showing past failures is relevant to showing a sustained wrong that culminated in damage to the entity after the petitioner became a stockholder. Under that rationale, the scope of inspection may extend to pre-ownership records.

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Court of Chancery Explains The "Some Evidence" Rule In Section 220 Cases

Louisiana Municipal Police Employees Retirement System, C.A. No. 2608-VCN (October 2, 2007).

To obtain inspection of corporate records to investigate allegations of wrongdoing, it has long been held that a stockholder must have "some evidence" that there was indeed wrongdoing to investigate. Otherwise, mere allegations would permit intrusive books and records reviews.

Here, the allegation was that options had been back dated and the Court permitted inspection based on a statistical analysis that showed stock price rises immediately after many option grants. The Court felt this was "some evidence" that warranted inspection. However, the Court was clearly skeptical and cautioned that it was going to continue as the gate keeper to limit inspections that were not justified.

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Court of Chancery Limits Inspection Rights

NAMA Holdings LLC v. World Market Center Venture LLC, C.A. No. 2756-VCL (July 20, 2007).

Frequently the rights of a member of an LLC or LP to inspect the entity's records is limited by the governing instrument. Thus, permitting only "reasonable access" is common. In this decision, the Court defines what "reasonable access" means, particularly when confidential information is involved.

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Court of Chancery Permits Inspection In Rights Offering

Robotti & Company LLC v. Gulfport Energy Corporation, C.A. No. 1811-VCN (July 3, 2007).

Applying standard books and records inspection law, this decision permitted inspection into the reasons why a subscription rights offering was structured so as to seemingly benefit insiders. This illustrates the reasoning process that the Court goes through to decide if there is enough basis to support a claim of possible wrongdoing that justifies granting a books and records inspection.

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Court of Chancery Limits Inspection For Proxy Battle

Pershing Square L.P. v. Ceridian Corporation, C.A. No. 2780-CC (Del. Ch. May 11, 2007).

To obtain inspection of corporate records, a stockholder must show that her purpose is a proper one. This decision holds that determining the suitability of a candidate to serve as a director is a proper purpose. That much is no surprise.

What is potentially more significant is the Court's other holding. This decision protects confidential business information from being used in a proxy contest, at least when the relevance of the confidential materials to the election seems strained. The Court was clearly concerned about discouraging frank communication to the board. More ›

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Court of Chancery Limits Inspection of Partnership Records

Holman v Northwest Broadcasting LP, C.A. No. 1572-VCN (Del. Ch. March 29, 2007).

When a stockholder or, as here, a partner demands inspection of an entity's records, the usual test of what records are to be produced is what is "essential and necessary" to the proper purpose for that inspection. Here the partner seeking inspection rights had been given audited financial information already. Thus, the Court had to decide if he needed more than those audited reports to accomplish his proper purpose, a valuation of his partnership interests.

As to those items in the audited report that were in enough detail to be used for valuation purposes, the Court denied further inspection. However, the result was different in the case of the audited reports' treatment of executive compensation. In that case, the Court concluded, the information was too general to be useful. How the compensation was allocated was important to any determination of whether that cost could be cut and the entity's value thereby increased. Therefore, the Court ordered that further information breaking down that cost be provided.

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Court of Chancery Grants Limited Inspection Rights

Shamrock Activist Value Fund LP v. iPass Inc., C.A. No. 2462-N (Del. Ch. December 12, 2006).

When seeking to inspect corporate records, the stockholder needs to have a reasonable purpose for doing so. If the stated purpose is to investigate wrongdoing, there must be a real basis to suspect wrongdoing or the demand will be denied. Here the demand was at least partially deficient because allegations of improper conduct seemed to be little more than that the company had not met its predicted financial results. The plaintiff escaped dismissal of its suit on narrow grounds that there were also allegations of a failure to carry out a plan that was more definite than just a prediction,  something closer to a promise that was broken.

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Court of Chancery Rejects Challenge To Stockholder Consent

B.F. Rich Co., Inc v. Gray,  C.A. No. 1896-N (Del. Ch. November 9, 2006) refused to consider the defense in Section 225 case that the plaintiff would hurt the corporation if he took it over. As the Court noted, the issues in Section 225 cases are tightly confined to the validity of the stockholder consent.  Any abuse of the power gained by use of those consents is for a later proceeding. More › Share

Court of Chancery Denies Books And Records Inspection

Polygon Global Opportunities Master Fund v. West Corporation, C.A. No. 2313-N (Del. Ch. October 12, 2006). Stockholders may seek inspection of corporate records to investigate potential wrongdoing. However, as this case holds, when they have purchased their stock after the wrongdoing is alleged to have occurred, they lack standing to pursue a claim for breach of duty and the court will therefore deny their request to inspect records on that claim. More › Share

Supreme Court Affirms the Credible Basis Rule

Seinfeld v. Verizon Communications Inc., C.A. No. 624 (Del. Supr. September 25, 2006). The Delaware Supreme Court has affirmed that the "credible basis" test applies to determine if a stockholder is entitled to inspect corporate records to investigate alleged wrongdoing. The stockholder argued that Delaware should permit his records inspection even if he lacked enough facts to convince the trial court that he had a credible basis to believe that the corporation was paying three top officers inappropriate compensation. He asserted that to require any real proof of his claims before inspection was an insurmountable burden. Both the Court of Chancery and now the Supreme Court rejected his argument and noted that there is considerable precedent granting inspection rights to show that this remedy is available in the right circumstances. More › Share

Court of Chancery Denies Stay In Books and Records Case

Wynnefield Partners Small Cap Value L.P. v. Niagara Corp., C.A. 1261-N, 2006 WL __________ (Del. Ch. Aug. 9, 2006). The normal rule in a books and records case is that a stay of the inspection will be granted when there is an appeal. In this case, however, the Court of Chancery denied a stay because the records related to a stockholder meeting that was about to occur. Subsequently, the Supreme Court granted the stay of inspection but ordered an expedited appeal to be able to issue an opinion before the stockholders' meeting. More › Share