Opinion ID: 2266317
Heading Depth: 1
Heading Rank: 4

Heading: Facilitating the Equity Method of Accounting

Text: At trial, plaintiff contended that it needed access to certain Leviton records to facilitate use of the equity method of accounting for its Leviton investment. The trial court concluded that: (1) plaintiff's stated accounting purpose is not a proper purpose as contemplated by Section 220 because it is not related to Thomas & Betts' status as a stockholder of Leviton; (2) Thomas & Betts' inability to use the equity accounting method was a problem of its own making; and (3) the factual bona fides of Thomas & Betts' contention ... are highly suspect. Thomas & Betts, supra, slip op. at 19. Plaintiff now argues that: (1) the trial court erred in holding that facilitation of equity accounting is not a proper purpose; and (2) it has met the evidentiary burden required to compel inspection. Accordingly, Thomas & Betts contends that it should be allowed access to a broad array of Leviton internal documents. Plaintiff's first contention  that the Court of Chancery erred in holding that Thomas & Betts' accounting purpose was improper  is without merit. As the trial court properly recognized, Section 220, by its express language, entitles a stockholder of a corporation to: inspect for any proper purpose the corporation's stock-ledger, a list of its stockholders, and its other books and records, and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder.... 8 Del.C. § 220(b) (emphasis supplied). The need to account for the Leviton investment by a particular method stems from Thomas & Betts' relationship with its own stockholders and bears no relationship to Thomas & Betts' status as a Leviton stockholder. As the Court of Chancery held in Lynn v. EnviroSource, Inc., Del.Ch., C.A. No. 11770, Chandler, V.C., 1991 WL 80242 (May 13, 1991), [w]hat is required by ... section [220] is that the purpose for the demand be reasonably related `to such person's interest as a stockholder.' That is, the purpose must be something that stockholders would be interested in because of their position as stockholders. Conversely, [a] purely individual purpose in no way germane to the relationship of stockholder to the corporation is not a proper purpose within the meaning of the statute. Catalano v. T.W.A., Del.Ch., C.A. No. 5352, Hartnett, V.C., mem. op. (Nov. 3, 1977) (citing State ex rel. Foster v. Standard Oil Co. of Kansas, Del.Super., 18 A.2d 235 (1941)). The Court of Chancery here correctly concluded that facilitation of equity accounting was not a proper purpose under Section 220. The need for equity accounting stems from Thomas & Betts' position as a publicly held corporation. Thus, it is the relationship of Thomas & Betts to its stockholders that created this need and not the relationship of Thomas & Betts to Leviton. Thomas & Betts contends that the trial court overlooked a number of cases where the stockholder's purpose for inspection was unique to the individual stockholder. The purpose advanced in each of these cases, however, was valuation of shares, the only purpose advanced by Thomas & Betts which the trial court accepted. [4] Assuming arguendo that Thomas & Betts' accounting purpose is deemed proper, it has nevertheless failed to meet its evidentiary burden. Despite Thomas & Betts' insistence on the use of equity accounting and KPMG Peat Marwick's purported concurrence in that view, Thomas & Betts has failed to demonstrate that this is the actual purpose for the information sought. As the trial court found, equity accounting may be used only in instances where the accounting stockholder exercises a degree of control over the company in which it holds an equity stake. GAAP provides that a stockholder with a 20 percent or greater stake enjoys a rebuttable presumption that such influence is exercised. This presumption has been rebutted in the case of Thomas & Betts' stake in Leviton. Thomas & Betts now owns a 29.1 percent interest in Leviton. [5] Harold Leviton, however, controls a voting trust representing 76.45 percent of the company's voting stock. Thomas & Betts has no representation on the Leviton board. Moreover, Harold Leviton has made it abundantly clear that he will thwart any effort by Thomas & Betts to exercise control, or a lesser measure of influence, over Leviton. On these facts, it is questionable whether Thomas & Betts can even justify use of equity accounting under GAAP. [6] Thomas & Betts' stated purpose is questionable at best and lacks record support sufficient to warrant granting the requested relief.