Posts tagged Books and Records

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

Court of Chancery Limits Use of Demand for Records

Highland Select Equity Fund, L.P. v. Motient Corp., C.A. No. 2092-N, 2006 WL 1903129 (Del. Ch. July 6, 2006). In this case, the Court of Chancery dismissed a demand to inspect the records of a Delaware corporation because the demand for inspection was abusive. A demand to inspect corporate records must be based on a good reason and when the request is to inspect allegations of wrongdoing, those allegations must have some basis. While the Court here felt that part of the test for inspection had been met, the way the plaintiff went about its request cost it the litigation. More › Share

Court of Chancery Determines Criteria To Decide Inspection Rights

Wynnefield Partners Small Cap Value LP v. Niagara Corp., C.A. No. 1261, 2006 WL 1737862 (Del. Ch. June 19, 2006). This is Section 220 action where the principal issue is whether the plaintiff had satisfied the criteria to inspect records related to alleged wrongdoing. The Court of Chancery held that merely alleging that wrongdoing had occurred was not sufficient to warrant inspection of corporate records. However, in some areas the Court held that sufficient facts had been alleged to justify record insepction. More › Share

Court of Chancery Aids The Missing Stockholder

Gildor v. Optical Solutions, Inc., C.A. No. 1416-N, 2006 WL 1596678 (Del. Ch. June 5, 2006). It is often not clear what a corporation is to do when it cannot find a missing stockholder. While 8 Del. C. §230 answers that question for stockholder meetings, what to do in other circumstances is less clear. In this decision, the Court of Chancery held that the corporation should at least look through its records to try to find the missing stockholder to give him notice of the right to acquire corporate stock. The failure to try harder led the court to extend the stockholder's time when he finally appeared. Share

Court of Chancery Orders Production of Documents in Books and Records Action

Sutherland v. Dardanelle Timber Co., C.A. No. 671-N (Del. Ch. May 16, 2006). Defendant objected to Master in Chancery's report granting relief to Plaintiff on majority of her requests in Section 220 action. Plaintiff objected to Master in Chancery's narrowing the scope of documents she demanded. More › Share

Court of Chancery Dismisses De Facto Dividend Claim Because Disguised as Improperly Pled Claim of Self-Dealing

Horbal v. Three Rivers Holdings, Inc., C.A. No. 1273-N, 2006 WL 668542 (Del. Ch. Mar. 10, 2006). Plaintiffs, founders of a Health Management Organization, alleged that their co-investors abused their positions by siphoning off tens of millions of dollars from the HMO in the form of disguised salaries and corporate perquisites; plaintiffs call these "de facto dividends." The Court of Chancery granted defendants' motion to dismiss because plaintiffs did not adequately allege self-dealing, the center of a de facto dividend claim. More ›

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Court of Chancery Denies Motion to Stay Books and Records Action in Favor of Separate Derivative Action Involving Substantially Similar Matters

Kaufman v. Computer Associates International, Inc., C.A. No. 699-N, 2005 WL 3470589 (Del. Ch. Dec. 13, 2005). A beneficial stockholder filed a books-and-records action pursuant to 8 Del.C. §220 seeking documents relating to the corporation's decision to settle certain derivative and federal class action litigation in a manner that allegedly benefited the individual wrongdoers at the corporation's expense. A special litigation committee acting on behalf of the corporation moved to stay this action until it completed its investigation on this issue, which had become the subject of new derivative litigation in New York brought by different plaintiffs. More › Share