In Polygon Global Opportunities Master Fund v. West Corp., 2006 WL 2947486 (Del. Ch., October 12, 2006), read opinion here, the Delaware Chancery Court addressed another request for books and records under DGCL Section 220 by a hedge fund and found it wanting, as explained in this thoroughly reasoned opinion. For another recent Chancery decision, Highland Select, denying a Section 220 request by an equity fund, due at least in part to the request being overly burdensome in scope, see the summary on this blog here. In that Highland case, trial was held about 6 weeks after the complaint was filed.
I have summarized about 30 Delaware decisions on DGCL Section 220 demands on this blog over the last 18 months or so (which can be searched by inserting "220" in the search box at the right margin of this blog). One theme that I see is that an enormous amount of time and money can be spent in an effort to obtain books and records under DGCL Section 220 without success. To look at the statute one might think it is a rather pedestrian procedure to follow in order for a shareholder to obtain books and records of the corporation in which she owns shares, but the cases suggest that it requires careful observance of the statutory requirements, which do not all lend themselves to mathematical precision.
This case involved a trial that took place about 2 months after the complaint was filed. To state the obvious, the limited scope of the trial was for the purpose of determining entitlement to the documents sought–something that in the ordinary case one would obtain in routine discovery.
The court noted that the plaintiff hedge fund often invested in arbitrage situations and in this case heavily invested in the defendant corporation following the announcement of a going private transaction. The stated purpose of the demand under 220 was to: (i) value their stock; (ii) determine whether to seek appraisal; (iii) investigate breaches of duty; and (iv) communicate with other stockholders.
The court found no entitlement in this case under Section 220 because the plaintiff: (i) had already obtained "all necessary, essential and sufficient" data to determine whether to seek appraisal; (ii) did not have a proper purpose to investigate wrongdoing; and (iii) did not seek a stockholder list for a proper purpose.
Notably, after suit was filed, the court asked the plaintiff to "prepare a chart" linking :(i) the documents sought with (ii) the proper purpose for each document sought, as asserted in the demand for records (resulting in a pared-down list prior to trial).
The court made clear that valuation of shares is a proper purpose for a Section 220 demand, especially in the context of determining whether to pursue an appraisal–but if the data is already available in the public domain (e.g., in an SEC filing) the Section 220 claim may be obviated. It was also made clear that SEC Rule 13e-3 requires, as here, more data about valuation in a going private transaction than would otherwise be available. This highlights the different lens through which a demand involving a public company will be viewed as opposed to a closely-held one. Although there is no per se rule that a Section 220 claim for valuation purposes may be mooted in a squeeze-out merger subject to disclosures under SEC Rule 13e-3, in this case that was the result.
It was also made clear (as stated in many cases) that a Section 220 case is not a substitute for normal discovery in a regular lawsuit, nor will it be allowed as a substitute for discovery in a subsequent appraisal action. The scope of documents available in regular discovery under Rule 34 is much different than the scope of documents available under Section 220 (citations omitted).
Referring to DGCL Section 327 and related cases, the court emphasized the important public policy against "the evil of purchasing stock in order to attack a transaction which occurred prior to the purchase of the stock" (citations omitted)(i.e., purchasing a basis for litigation). Due to the claim here that the investigation into wrongdoing related to an event prior to the purchase of stock, the court observed that the plaintiff did not have standing for a derivative claim; nor did it have standing to make allegations based on entire fairness.
Regarding its alleged interest in communication with other stockholders, though the burden is on the corporation in this type of request to establish an improper purpose for the request of a stockholder list, and is rarely denied, here the reason for the request was based on the 2 prior reasons which were rejected by the court. (e.g., the list was not requested for a proxy solicitation but merely to "share" what it got from the Section 220 case and to inquire about anyone else who might be seeking appraisals.) In sum, on this point, the court said that simply because a stockholder may communicate with other stockholders based on Federal Securities Laws, that fact in and of itself does not support a proper purpose under Section 220.
Though it might be tempting to do so, I don’t think this case can be read as imposing a higher hurdle for hedge funds making a Section 220 demand. Rather, the relevant background of the stockholder, to the extent it provides insight into the stockholder’s intent in buying the stock, and its "end-game", will be part of the court’s analysis of whether the requirement of a "proper purpose" has been satisfied.
If this blog format lent itself to footnotes, I would add one in closing here, but instead I will mention this aside as a final sentence. As a human interest anecdote, few people have the pleasure of seeing in a court’s opinion in a case that one has argued, that the court has cited to an article or a treatise that one has written in the same case (especially when that same lawyer prevailed). So it is in this case that my friend Michael Pittenger was on the winning side, and the court in its opinion cited to a leading treatise that Mike co-authored, titled: Donald Wolfe and Michael Pittenger, Corporate and Commercial Practice in the Delaware Court of Chancery (2006). It must make victory even sweeter. Congratulations, Mike.