Delaware Court Of Chancery Rejects Books-And-Records Demand Driven By Entrepreneurial Counsel
On November 13, 2017, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery rejected a stockholder’s demand to inspect books and records of A. Shulman, Inc. (the “Company”) under Delaware General Corporation Law Section 220. Wilkinson v. A Schulman, Inc., C.A. No. 2017-0138-VCL (Del. Ch. Nov. 13, 2017). The Court explained that a stockholder who lacks a “proper purpose” and has “only minor and non-substantive involvement” in the demand process is not entitled to inspect books and records.
By a demand letter dated August 19, 2016, plaintiff—an individual stockholder—requested specified categories of the Company’s books and records pursuant to Section 220. The demand letter was directed at the investigation of issues related to the Board’s decision to accelerate the vesting of restricted stock for the Company’s former CEO, who retired at the end of 2014. In this regard, the demand asserted that there was a credible basis to suspect corporate waste and a breach of the duty of loyalty. The Company rejected the demand, including a follow-up from plaintiff’s counsel, in its entirety. Plaintiff filed suit on the demand on February 22, 2017.
According to the Court: “[T]he trial record established that the purposes for the inspection belonged to [plaintiff’s] counsel . . . and not to [plaintiff] himself. [Plaintiff] simply lent his name to a lawyer-driven effort by entrepreneurial plaintiffs’ counsel.” Specifically, plaintiff “admitted that the purposes for inspection articulated in the demand letter were not his purposes and that [counsel] came up with each of them.” Indeed, plaintiff testified he was unaware of facts relating to the compensation decision and instead decided to pursue the books-and-records demand because he was “unhappy” with the Company’s financial performance. Moreover, after signing the demand, plaintiff was not involved in counsel’s effort to obtain the documents. As to the lawsuit itself, plaintiff “did not take any steps to confirm the accuracy of the allegations in the complaint; he simply verified the pleading in reliance on counsel.” The Court also noted that plaintiff had served as a “nominal” plaintiff for the same counsel in at least seven other lawsuits.
The Court explained that, in a Section 220 action, “a stockholder has the burden of proof to demonstrate a proper purpose by a preponderance of the evidence.” Moreover, a stated purpose is not a proper purpose if it is not the stockholder’s “actual purpose.” Further, while a stockholder “obviously can use counsel to seek books and records,” that is “fundamentally different than having an entrepreneurial law firm initiate the process, draft a demand to investigate different issues than what motivated the stockholder to respond to the law firm’s solicitation and then pursue the inspection and litigate with only minor and non-substantive involvement from the ostensible stockholder principal.” Here, according to the Court, the Company established that the stockholder’s purported purposes were not his actual purposes; instead, they were his counsel’s purposes. Therefore, the Court denied the books-and-records demand.