Opinion ID: 2266317
Heading Depth: 1
Heading Rank: 3

Heading: Plaintiff's Claims of Waste and Mismanagement

Text: As found by the Court of Chancery, plaintiff's claims of waste and mismanagement are grounded on Leviton's purportedly substandard financial performance, the company's failure to pay dividends, Leviton's poor cash flow and the company's higher than average expenses. As specific instances of misconduct, plaintiff asserted that: (a) Leviton has paid for the Leviton family's personal expenses, including use of the company's accounting firm for tax and estate planning purposes; (b) Leviton has been overcompensating its officers and directors at the shareholders' expense; and (c) Leviton's lease agreements with members of the Leviton family are self-dealing transactions. Thomas & Betts, supra, slip op. at 15. The trial court found, however, that these claims are so lacking in record support that inspection could not be justified. Plaintiff contends that the Court of Chancery applied an incorrect legal standard in determining that plaintiff's stated purpose lacked adequate record support. Specifically, Thomas & Betts points to portions of the trial court's holding which appear to impose on plaintiff a greater-than-normal evidentiary burden, to adduce evidence from which a credible possibility of mismanagement and waste may be inferred and to adduce specific evidence of waste and mismanagement. Id. The Court of Chancery incorrectly articulated the governing legal standard. It is well established that investigation of waste and mismanagement is a proper purpose for a Section 220 books and records inspection. Nodana Petroleum Corp. v. State, Del.Supr., 123 A.2d 243, 246 (1956). When a stockholder seeks inspection of books and records, the burden of proof is on the stockholder to demonstrate that his purpose is proper. CM & M Group, 453 A.2d at 792. [2] In order to meet that burden of proof, a stockholder must present some credible basis from which the court can infer that waste or mismanagement may have occurred. Skouras v. Admiralty Enters., Inc., Del.Ch., 386 A.2d 674, 678 (1978) (more than a general statement is required in order for the Court to determine the propriety of a demand); Helmsman Management Servs., Inc. v. A & S Consultants, Inc., Del.Ch., 525 A.2d 160, 166 (1987) (A mere statement of a purpose to investigate possible general mismanagement, without more, will not entitle a shareholder to broad § 220 inspection relief. There must be some evidence of possible mismanagement as would warrant further investigation of the matter.); Neely v. Oklahoma Publishing Co., Del.Ch., C.A. No. 5293, Brown, V.C. (Aug. 15, 1977); Everett v. Hollywood Park, Inc., Del.Ch., C.A. No. 14556, Jacobs, V.C., mem. op., 1996 WL 32171 (Jan. 19, 1996) (Where, as here, the plaintiff's purpose is to investigate possible waste or mismanagement, she must also adduce evidence of potential mismanagement sufficient to support her suspicions and to warrant going forward.). While stockholders have the burden of coming forward with specific and credible allegations sufficient to warrant a suspicion of waste and mismanagement, they are not required to prove by a preponderance of the evidence that waste and management are actually occurring. [3] A general standard that a stockholder seeking inspection of books and records bears a greater-than-normal evidentiary burden is unclear and could be interpreted as placing an unduly difficult obstacle in the path of stockholders seeking to investigate waste and mismanagement. Viewed in context, however, the articulation in dispute here accurately describes a stockholder's position in cases such as the one at bar, where substantial evidence supports a finding that plaintiff's primary motives for the inspection are improper. In the final analysis, the decision of the trial court did not turn solely on a legal conclusion that Thomas & Betts had failed to meet an elevated evidentiary burden. As discussed further, infra, the trial court's determination turned, in large part, on the Vice Chancellor's determination that plaintiff's witnesses were not credible. According appropriate deference to the factual findings of the Court of Chancery, we conclude that plaintiff failed to satisfy the appropriate standard for inspection of the books and records with regard to the claim of waste and mismanagement. Levitt v. Bouvier, Del.Supr., 287 A.2d 671, 673 (1972) (When the determination of facts turns on a question of credibility and the acceptance or rejection of `live' testimony by the trial judge, his findings will be approved upon review.); State ex rel. Scattered Corp., Del.Supr., No. 444, 1995, Veasey, C.J. (April 4, 1996) (ORDER) (The determination of whether Scattered's stated purpose for the inspection was its primary purpose, is a question of fact warranting deference to the trial court's credibility assessments.) Thomas & Betts argues that the trial court erroneously characterized as hearsay certain witness statements concerning Blumberg's discussions with Thomas & Betts. Where an in-court witness testifies to the substance of statements made by an out-of-court declarant and the testimony is offered to prove the truth of the matter asserted, a hearsay problem arises. This is precisely the situation faced by the trial court. Plaintiffs did not call Blumberg to the witness stand. Rather, various Thomas & Betts insiders sought to prove that waste and mismanagement had occurred at Leviton by testifying to the substance of statements made by Blumberg during his negotiations with Thomas & Betts. Plaintiff contends, however, that the statements were not offered to prove the truth of the matter asserted, but were intended to show that Thomas & Betts believed that waste and mismanagement were occurring at Leviton ( i.e., to show Thomas & Betts' state of mind). This argument is unavailing in light of the discussion above. Thomas & Betts' subjective belief that wrongdoing has occurred is insufficient to meet the evidentiary burden required to compel inspection. Plaintiff's contention that testimony concerning Blumberg's statements falls within the hearsay exception of D.R.E. 801(d)(2)(D) is similarly unavailing. D.R.E. 801(d)(2)(D) allows hearsay testimony of an agent or servant concerning matters within the scope of his agency or employment. Here, Blumberg was acting in his capacity as a stockholder of Leviton when the statements were made. Moreover, as the trial court found, Blumberg was actively engaged in the process of defecting to the Thomas & Betts camp. Statements made in this context lack independent guarantees of trustworthiness and are inherently unreliable. The trial court was correct in so concluding. More significantly, the trial court did not exclude this testimony. Rather, the Vice Chancellor heard the testimony and found it unworthy of belief. In this posture, plaintiff's evidentiary objections carry little weight. Similarly, Thomas & Betts' citation to Skoglund v. Ormand Industries is unavailing. Skoglund, 372 A.2d at 208, 211-13. As in the case at bar, the Skoglund court allowed hearsay testimony regarding statements made by a corporate insider. Unlike the instant case, however, the trial court in Skoglund chose to credit that testimony as worthy of belief. Finally, plaintiff's arguments ignore the underlying posture of this case. Unlike the cases relied on by plaintiff, this case does not involve a typical uninformed stockholder seeking to protect his or her investment. Thomas & Betts acquired its shares in Leviton with the acknowledged purpose of acquiring the company. Moreover, Thomas & Betts did so with full knowledge that Leviton's CEO would likely oppose any such transaction. Thomas & Betts first praised Harold Leviton for his expert management of the company, seeking an amicable union of the two corporations. When Thomas & Betts' friendly overtures proved unavailing, it filed an inspection demand to create leverage. Its self-avowed acquisition motives cast serious doubt on the genuineness of its claim that it seeks the books and records to investigate waste and mismanagement. These facts were properly before the Court of Chancery. See, e.g., Helmsman Management Servs., 525 A.2d at 164 (The propriety of a demanding shareholder's purpose must be determined from the facts in each case, and the burden of proving a proper purpose is upon the shareholder.). The Court of Chancery concluded that Thomas & Betts' initial primary purpose in seeking a books and records inspection was ... to exert pressure on Harold Leviton to negotiate a sale of his controlling interest or, alternatively, the entire company. Thomas & Betts, supra, slip op. at 22. Ultimately, the Court of Chancery found Thomas & Betts' articulated purpose to be highly opportunistic and unworthy of belief. Thomas & Betts has provided no reason for this Court to revisit those factual determinations and credibility assessments.