Smith v. Horizon Lines, Inc., No. 4573-CC (Del. Ch., August 31, 2009), read letter decision here. ( A separate complaint involving Horizon in a class action suit pending in federal court in Delaware can be read here.)
This letter decision found a lack of strict compliance by the plaintiff with the section of the Delaware General Corporation Law (“DGCL”) that allows a shareholder to demand books and records from a corporation. In particular, Section 220(b) of the DGCL imposes certain prerequisites that must be satisfied in order for the stockholder to obtain certain corporate books and records.
Summary of Court’s Reasoning
DGCL Section 220(b) provides that where a stockholder is other than a record holder of stock, the demand under oath for books and records shall state the status of the person as a stockholder, and also must be “accompanied by documentary evidence of beneficial ownership of the stock, and state that such documentary evidence is a true and correct copy of what it purports to be.” However, in this case the demand letter was accompanied merely by a heavily redacted account statement that showed simply that someone by the name of Smith owned “some type of Horizon security at some unknown time.” The Court relied on a prior decision in which a complaint under Section 220 was dismissed for failure to strictly comply with the statute. See Mattes v. Checkers Drive-In Rests., Inc., 2000 WL 1800126 (Del. Ch. Nov. 15, 2000).
In the present case, the Court reasoned that the “heavily redacted page that lacked the full name of the owner and the date of ownership does not satisfy the ‘documentary evidence’ requirement of the statute and therefore supported dismissal.”
There were two primary bases for the Court’s reasoning. First, the Court determined that the requirement in Section 220 for both “documentary evidence of beneficial ownership of the stock” and that the beneficial owner “state that such documentary evidence is a true and correct copy of what it purports to be” must both be satisfied. The sworn statement of the stockholder is an independent requirement under Section 220 and the Court emphasized that such a statement was not a substitute for the separate requirement of “documentary evidence of beneficial ownership.”
The second pillar on which the Court’s reasoning relied, was explained by the Court in terms of the intent of the General Assembly which wanted any stockholder who was not a “record owner” (i.e., that the company could independently confirm as a shareholder), to prove her beneficial ownership. This purpose of Section 220 could not be served if the shareholder supplies a document that does not actually evidence that she is the beneficial owner of the stock on the relevant date.
In sum, although the Court found that the failure to comply strictly with the statute required that the Motion to Dismiss be granted, without prejudice, the Court also allowed for the complaint to be amended within 30 days with a new demand letter that attached unambiguous documentation to evidence beneficial ownership of Horizon stock.