Section 220 of the Delaware General Corporation Law authorizes a stockholder to demand to inspect a corporation’s books and records for any proper purpose. 8 Del. Code § 220. The statute defines a “proper purpose” as “a purpose reasonably related to such person’s interest as a stockholder.” Id. In Wilkinson v. A. Schulman, Inc., No. 2017-0138-VCL, 2017 WL 5289553 (Nov. 13, 2017), the Delaware Chancery Court held that if the purpose of a records request originates with a stockholder’s counsel, rather than the stockholder herself, the purpose is not proper under Section 220.
Plaintiff Wilkinson sought to inspect the books and records of defendant A. Schulman, Inc. (the “Company”). His demand letter identified four purposes related to the Board’s decision to accelerate the vesting of shares of restricted stock for the Company’s President and CEO upon his retirement. The Company argued that Wilkinson should not be entitled to an inspection because the purposes articulated in the demand were not Wilkinson’s actual purposes. “A corporate defendant may resist demand where it shows that the stockholder’s stated proper purpose is not the actual purpose for the demand.” Id. at *2.
After trial, the court concluded that the purposes for the inspection belonged to Wilkinson’s counsel rather than Wilkinson himself. Indeed, Wilkinson testified he was unhappy with the Company’s announcement of negative financial results, so he decided to pursue a books and records inspection. As he put it, “[t]hey lost $365 million, which is a pretty good reason, don’t you think?” Id. at *3. However, his inspection request did not relate to financial performance. Instead, it related to the board’s decision to accelerate vesting of stock held by the former CEO. Wilkinson admitted that those purposes were not his purposes, but rather were drafted by his counsel. As the court put it, “Wilkinson simply lent his name to a lawyer-driven effort by entrepreneurial plaintiffs’ counsel. Id. at *2.
Wilkinson was no more involved after he signed the draft letter. He was not involved in his counsel’s effort to obtain documents, or, after the Company refused to provide documents, in preparing his complaint. While he did sign complaint’s verification, Wilkinson did not make any effort to confirm its accuracy, instead relying on counsel. After the Company served interrogatories, Wilkinson did not participate in drafting the responses, but verified what counsel wrote. The responses stated that the persons most knowledgeable about the purposes in the demand were Wilkinson’s counsel, not Wilkinson. Wilkinson admitted this at deposition.
As a result, the court held that Wilkinson was not permitted to inspect the Company’s books and records. The court stated, “A stockholder obviously can use counsel to seek books and records.” Id. at *3. But a stockholder seeking an inspection and retaining counsel to carry out the stockholder’s wishes 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. Id.
This holding raises some questions. Plaintiffs feel aggrieved about a situation and formulate their own theory about what went wrong. Then, after consultation with counsel, that theory changes with great frequency. Wilkinson suggests these kinds of changes may not be permissible in the context of a Section 220 records request. That said, the disparity between the reason articulated by Wilkinson — financial performance — and the reasons contained in his request drafted by counsel related the redemption of stock have nothing in common. While the court did not explicitly say so, this disparity perhaps influenced its decision.
In addition, the court was influenced by the long-standing relationship between Wilkinson and his counsel. It stated: “Wilkinson’s service as a nominal plaintiff for [his counsel] in this action is consistent with his past relationship with the firm. Wilkinson has served as a plaintiff for [his counsel] in at least seven lawsuits, most of which challenged mergers.” Id. at *4. The court may not have been pleased with Wilkinson’s status as a professional nominal plaintiff, and that may have subjected his records request to a higher degree of scrutiny.
At Novack and Macey, we have extensive experience advising shareholders involved in closely held company disputes, as well as advising companies on how to avoid disputes in the first place. For more information about our services, please contact John Haarlow at 312.419.6900 or email@example.com.