In the Section 220 books and records inspection case of PVH Polymath Venture Holdings Ltd. v. TAG Fintech Inc., C.A. No. 2023-0502-BWD (Del. Ch. Jan. 26, 2024), PVH Polymath Venture Holdings Ltd. ("Polymath") sought inspection of TAG Fintech, Inc.'s ("TAG") records after discovering TAG had submitted a forged letter to Pakistani regulators. The decision is significant in that the Court of Chancery granted fee-shifting in favor of Polymath in light of TAG's obstructionist conduct, and ultimately appointed a receiver following TAG's non-compliance with Court orders.
Despite conceding that Polymath had proper purposes to make its demand, TAG nonetheless rejected inspection based on a pretextual claim about the authority of Polymath's representative, even though TAG had previously dealt with him directly. The company then attempted to use Pakistani court injunctions that the Court found TAG likely orchestrated to avoid production. TAG further complicated the proceedings by producing an untimely expert opinion on Cyprus law after discovery closed and attempting to unilaterally cancel Polymath's shares on the eve of trial. The company also imposed unnecessary burdens by requiring in-person inspection in Abu Dhabi and refusing to stipulate to document authenticity.
Then Magistrate in Chancery Bonnie W. David, who has since been elevated to the position of Vice Chancellor, found TAG's conduct "glaringly egregious" and ordered fee-shifting. In its analysis, the Court noted that while perhaps one of these positions alone could be excused as aggressive defense, collectively they demonstrated bad faith warranting the exceptional remedy of fee-shifting.
Following the Court's ruling, further motion practice ensued, including Polymath filing a further motion to compel compliance with the Court's prior order granting inspection, and moving for a receiver given TAG's failure to produce documents or pay Polymath's fee-shifting award. On July 1, 2024, the Court granted Polymath's motion and appointed a receiver over TAG.
Key Takeaway
This opinion illustrates that Delaware corporations responding to Section 220 inspection demands must engage in good faith and avoid unreasonable litigation tactics designed to frustrate the stockholder. Engaging in a pattern of obstructive conduct risks fee-shifting sanctions and the ultimate appointment of a receiver over the company to compel compliance.
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