Can a former shareholder whose stock was cancelled in a merger bring suit for corporate books and records under Delaware law? In a recent decision, the Court of Chancery gave a clear answer to this question of first impression. No — the plaintiff must be a stockholder when the suit is filed. Weingarten v. Monster Worldwide Inc., 2017 WL 752179 (Del. Ch. 2017).
Section 220 of the Delaware General Corporate Law gives stockholders the right to inspect a company's books and records "for any proper purpose" and to sue to compel the inspection if the company refuses. In Weingarten, the plaintiff made a demand for books and records under Section 220 shortly before a merger was scheduled to close but did not file suit until after the closing. As a result of the merger, the plaintiff's shares were canceled and he ceased to be a stockholder.
The court found that the language of Section 220 is plain and unambiguous on this issue; to bring suit, the plaintiff must be a stockholder at the time the action is filed.
This result may seem obvious from a plain reading of the law, which requires that the plaintiff establish that "[s]uch stockholder is a stockholder." But the plaintiff argued that he did make his initial demand to inspect the books and records before the closing. In other words, the plaintiff had begun the broader Section 220 process while he was a stockholder. It was only the filing of the complaint that occurred after the merger extinguished his stock.
The court was not persuaded by this argument. And it distinguished cases in which stockholders lost their stock through a merger after the action was filed. There, the plaintiffs met the statutory requirements when the complaint was filed; the cancellation of their shares during the pendency of the action did not affect their standing. Cutlip v. CBA Int'l, Inc. 1995 WL 694422 (Del. Ch. 1995); Deephaven Risk Arb Trading Ltd. v. UnitedGlobalCom, Inc. 2005 WL 1713067 (Del. Ch. 2005).
Though this case turns on an issue of first impression, it is in line with a body of decisions requiring a stockholder to carefully comply with all of Section 220's technical requirements, both in the initial demand to the corporation and in the suit before the court. See, e.g., Central Laborers Pension Fund v. News Corp., 45 A.3d 139 (Del. Ch. 2011); Seinfeld v. Verizon Commc'ns, Inc., 909 A.2d 117, 118 (Del. 2006). Technical failures will result in a rejection of the demand by the company and, quite possibly, a refusal by the court to compel inspection.
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