Delaware Court Of Chancery Grants Shareholder’s Post-Merger Books And Records Demand, Finding “Credible Basis” To Investigate Merger Process
On August 28, 2019, Vice Chancellor Kathaleen S. McCormick of the Delaware Court of Chancery granted a shareholder’s demand under 8 Del. C. § 220 to inspect the books and records of defendant GGP Inc. for the purpose of investigating potential mismanagement. Kosinski v. GGP Inc., C.A. No. 2018-0540 (Del. Ch. Aug. 28, 2019). Plaintiff’s demand stemmed from a merger in which defendant, a real estate company, was acquired by Brookfield Property Partners L.P., another real estate company that owned approximately one third of defendant’s common stock at the time. Plaintiff contended that the buyer had been defendant’s de facto controlling shareholder and the procedural protections necessary for deferential review of a merger process involving a controller—under Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”)—had not been implemented. Following trial, the Court granted plaintiff’s Section 220 demand, holding that where procedural protections are absent, “it is possible that the transaction was not at arm’s length,” and finding that plaintiff had demonstrated facts that established a “credible basis” to investigate potential breaches of fiduciary duty. But the Court noted that it was making an “exceptionally modest point” and not announcing a rule that noncompliance with MFW procedural protections “automatically supplies a credible basis.”
Defendant challenged the demand primarily on two grounds. First, defendant argued that plaintiff’s stated purposes for inspection were “his lawyer’s rather than his own” because plaintiff originally retained counsel in order to challenge the merger, rather than inspect defendant’s books and records. In rejecting what it called a “deeply misguided” argument, the Court reasoned that plaintiff’s “deposition revealed him to be motivated to inspect [defendant’s] documents, apprised of the contents of the demand and the circumstances of the merger, and chalk-full of common sense.”
Second, defendant argued that plaintiff’s stated purposes for inspection were improper. Again, the Court concluded otherwise. Plaintiff sought to investigate potential breaches of fiduciary duty and director disinterestedness in connection with the merger and to obtain corporate records to enable the valuation of his shares. As to potential mismanagement and director disinterestedness, the Court explained that, even though defendant had established a special committee to negotiate the merger, plaintiff had “point[ed] to facts” (1) showing that its members potentially were interested or lacked independence, and (2) “suggesting that the Special Committee failed to obtain a fair price.” The Court also held that plaintiff had a right to seek corporate records to further inform his valuation of his stock at the time of the merger, even though plaintiff already had a view regarding that value.