Delaware Court Of Chancery Grants Minority Stockholder’s Section 220 Demand As To Emails But Denies Access To Merger-Related Drafts
On July 30, 2018, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery partially granted a Section 220 demand for the books and records of Globalstar, Inc. brought by the company’s largest minority stockholder, Mudrick Capital Management, L.P. Mudrick Cap. Mgmt, L.P. v. Globalstar, Inc., C.A. No. 2018-0351-TMR (Del. Ch. July 30, 2018). The demand arose in the context of a pending merger between Globalstar and Thermo Acquisitions, Inc., an entity controlled by Globalstar’s CEO and controlling stockholder. The parties did not dispute that Mudrick Capital’s demand was based on several proper purposes in connection with evaluating certain aspects of the merger and Globalstar agreed to produce various categories of documents. Resolving remaining disputes about the scope of the production, however, the Court held that emails were subject to production, but denied the demand for draft board minutes and other draft materials.
Globalstar was allegedly facing liquidity issues. To address this, Globalstar entered into a merger agreement with Thermo Acquisitions, in which Globalstar would receive various assets—including ownership of another entity, FiberLight, LLC, various properties and equity interests, and $100 million in cash—in exchange for Globalstar common stock. In connection with the merger, Globalstar’s CEO and controlling stockholder, who also controlled Thermo Acquisitions, would see his 53% interest in Globalstar increase to more than 80% in the surviving entity. The merger was approved by a Globalstar special committee and its full board of directors.
Mudrick Capital made a demand on Globalstar to inspect its books and records pursuant to 8 Del. C. § 220, seeking multiple categories of documents. Globalstar ultimately agreed to produce certain documents and did not dispute that several purposes stated by Mudrick Capital were proper, including the investigation of possible breaches of fiduciary duty and the evaluation of various aspects of the merger. But Mudrick Capital contended that the production was inadequate because Globalstar did not produce emails related to the merger, documents and communications related to the valuation of FiberLight, and draft minutes and other draft merger-related materials.
The Court was thus called upon to resolve the scope of the required production, which it emphasized is “limited to only those books and records that are ‘necessary and essential to accomplish the stated, proper purpose.’” After a one-day trial, the Court found that Mudrick Capital adequately demonstrated that “(1) the produced documents do not allow it to adequately address the stated purposes, and (2) the produced documents also suggest that other documents exist, including emails, that address the crux of the stated purposes and are unavailable from another source.” Moreover, the Court held that emails are not inherently immune from production pursuant to Section 220. The Court thus granted the demand as to emails related to the merger and documents related to the valuation of FiberLight. But the Court found that Mudrick Capital “simply ha[d] not shown that draft minutes are necessary in light of all the documents that have been and will be produced” or a need for other draft materials.
With regard to the emails sought by Mudrick Capital, the Court granted the demand as to three of the four requested custodians, including Globalstar’s CEO/controlling stockholder, Globalstar’s General Counsel, and the special committee chair. The Court referred to their involvement with the merger, including the CEO’s undisputed “central role,” the General Counsel’s possession of many of the requested documents, and the special committee chair’s participation in negotiations. The Court denied access to the emails of another special committee member because Mudrick Capital failed to show the need for it in addition to the special committee chair’s emails.