Delaware Court Of Chancery Dismisses Section 220 Action Initiated Hours After Certificate Of Merger Was Filed With Delaware Secretary Of State
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  • Delaware Court Of Chancery Dismisses Section 220 Action Initiated Hours After Certificate Of Merger Was Filed With Delaware Secretary Of State
     
    12/21/2021
    On December 3, 2021, Vice Chancellor Lori W. Will of the Delaware Court of Chancery granted a motion to dismiss claims to compel inspection of books and records brought by a former stockholder of Houston Wire & Cable Company (the “Company”) in connection with the Company’s all-cash merger into Omni Cable, LLC.  Swift v. Houston Wire & Cable Co., C.A. No. 2021-0525-LWW (Del. Ch. Dec. 3, 2021).  The merger agreement provided that each share of the Company would be cancelled and converted into the right to receive $5.30 in cash at the “Effective Time,” which it explained was “such time as [a] Certificate of Merger” is filed.  Plaintiff filed the action under Section 220 of the Delaware General Corporation Law (“DGCL”) hours after the Company’s certificate of merger was filed with the Delaware Secretary of State.  The Court held that Section 220 requires a plaintiff to be a current stockholder at the time the litigation is initiated.  The Court found that plaintiff “ceased to own stock” when the certificate of merger was filed and, therefore, lacked standing when the complaint was filed later the same day.

    The Court explained that a Section 220 plaintiff must have both made a demand at a time it was a stockholder and continue to be a stockholder at the time the Section 220 litigation is subsequently initiated.  Recognizing the decision in this case may be a “harsh result,” the Court highlighted that current stock ownership at the time of the filing of the complaint is an express requirement of Section 220, which mandates that the stockholder establish that “such stockholder is a stockholder.” 

    The Court further explained that, under Section 251 of the DGCL, the merger agreement is to provide for the manner of cancelling shares.  Thus, the shares were cancelled in accordance with the merger agreement upon filing of the certificate of merger even though the merger agreement provided for the “closing” of the merger no sooner than the following day.  The Court also explained that it did not matter that the “shares” continued to trade in the hours following the “Effective Time” because the cancellation of the shares meant that the “instruments being traded represented only the right to receive the Merger Consideration.”   The Court noted, however, that stockholders do not lose standing if they lose their stock through a merger while a Section 220 action is pending, as long as they were stockholders when the litigation was initially filed. 
    CATEGORIES: Books and Records, Standing

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