Opinion ID: 2258949
Heading Depth: 1
Heading Rank: 2

Heading: Proper Purpose: U.S. Die's Claim of Mismanagement

Text: Section 220 of the Delaware General Corporation Law permits a stockholder, who shows a specific proper purpose and who complies with the procedural requirements of the statute, to inspect specific books and records of a corporation. [3] In the case sub judice, the Court of Chancery, after a trial which included live witnesses and documentary evidence, found that, [a]ccording to the Amended Complaint and Plaintiff's Trial Brief and Plaintiff's Post-Trial Reply Brief, Plaintiff's purpose for requesting an inspection of Defendant's books and records is to investigate the possibility of corporate mismanagement. [4] It is well established that investigation of mismanagement is a proper purpose for a Section 220 books and records inspection. [5] A stockholder's entitlement to inspection of corporate books and records depends on whether or not a credible basis to find probable wrongdoing on the part of corporate mismanagement has been established. [6] At the trial of a summary proceeding under Section 220(d), the plaintiff must show the credible basis by a preponderance of the evidence. The actual wrongdoing itself need not be proved in a Section 220 proceeding, however. This Court reviews de novo the question of a proper purpose under Section 220(b). [7] Defendant's first contention is that the Court of Chancery erroneously relied upon plaintiff's written proffer, i.e., its Amended Complaint, Trial Brief, and Post-Trial Reply Brief. Defendant argues that the trial court should have relied instead on the trial testimony of David Slyman, the President, Chief Executive Officer, and sole stockholder of U.S. Die. Concerning the purpose for the inspection, Slyman testified: I would like to make my own decision as to why the merger was not completed. Telling me that it was a difference of philosophies didn't get me to understand why it was not completed. The philosophy was there prior to it.... Defendant argues that the purpose which Slyman articulated at trial was insufficient and that this insufficiency is fatal. This argument must fail. Slyman's testimony does call into question defendant's purported reason for abrogating the Merger Agreement  namely, that the realization that Mid Am's management philosophy and direction were fundamentally different from its own. [8] The Court of Chancery found defendant's reason suspect. The Court stated that [a] reasonable stockholder could conclude prudent management would have researched `fundamental' similarities and dissimilarities of the merging company before entering the Merger Agreement. [9] In addition to arguing that the purpose which Slyman articulated at trial was insufficient, defendant contends that the Court of Chancery should have relied solely on Slyman's testimony in order to deduce plaintiff's purpose for its books and records demand. The failure of plaintiff's key witness to articulate certain magic words while testifying at trial is not fatal to a Section 220 action. [10] Although the Court of Chancery referred, somewhat cryptically, to a written proffer which was incorporated in plaintiff's pleadings and briefs, we understand that the trial court considered the totality of the trial record in making its findings. Accordingly, we find that the Court of Chancery properly relied on all of the evidence adduced at trial. [11] Most importantly, the trial judge made credibility assessments of live witnesses. Defendant next contends that the Court of Chancery applied an incorrect legal standard, when it stated, I accept Plaintiff's written proffer [that] this payment alone represents a specific transaction raising the plausibility of more than speculative, general mismanagement. [12] This Court recently stated, 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, [13] and cited with approval the following proposition: 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. [14] The difference between the Vice Chancellor's finding that a specific transaction rais[ed] the plausibility of more than speculative, general mismanagement [15] and the requirement that [t]here must be some evidence of possible mismanagement as would warrant further investigation [16] is merely semantic. Finally, defendant maintains that plaintiff failed to produce any evidence of mismanagement. This argument misses the point. In a Section 220 action, a stockholder has the burden of proof to demonstrate a proper purpose, [17] but a stockholder is not required to prove by a preponderance of the evidence that waste and [mis]management are actually occurring. [18] The threshold for a plaintiff in a Section 220 case is not insubstantial. Mere curiosity or a desire for a fishing expedition will not suffice. But the threshold may be satisfied by a credible showing, through documents, logic, testimony or otherwise, that there are legitimate issues of wrongdoing. As specific instances of misconduct, plaintiff questions defendant's payment of $275,000 to Mid Am when Defendant never broke the Merger Agreement. [19] Plaintiff also questions defendant's failure to request documentation from Mid Am of its expenses to justify defendant's expenditure of $275,000, which was $25,000 more than the Merger Agreement stipulated for expenses. [20] On their face, these issues raise questions. The effect of the Vice Chancellor's conclusion after trial is that the questions remain. Defendant also agreed to pay Mid Am $2 million contingent on the certain occurrences within one and a half years of the Termination Agreement. Pursuant to the Merger Agreement, defendant previously had agreed to pay Mid Am $2 million contingent on the same occurrences within one year. As plaintiff's counsel, in a letter dated 1/19/95 to Security First's Chairman and CEO Charles Valentine, stated This either takes the company `out of play' or diminishes the amount payable to the stockholders if it is sold. In either event, the agreement seems inappropriate and destructive to stockholder values. The Court of Chancery also viewed as evidence suggestive of misconduct the fact that, after the Termination Agreement was disclosed, the value of defendant's common stock dropped significantly and has not rebounded. Moreover, defendant has increased dividend payments to its stockholders since the termination. According to the Court of Chancery, A thoughtful stockholder might look at this dividend increase as an effort to ameliorate dismay about the Board of Directors' abandonment of a seemingly beneficial merger for Security First stockholders. [21] In the instant case, the Court of Chancery found: Contrary to Defendant's allegations, the evidentiary hearing produced testimony substantiating Plaintiff's claim. I listened to the trial testimony, observed the demeanor of the witnesses, and assessed their apparent frankness and the fairness of their testimony. I find Plaintiff's stated proper purpose convincing. Plaintiff's proper purpose is tied specifically to the point in time of Defendant's failure to consummate the Merger Agreement.... [22] The trial court's decision turned in part on the Vice Chancellor's determination that defendant's witnesses were not credible. [23] When the determination of facts turns on a question of credibility and the acceptance or rejection of `live' testimony by the trial judge, [the trial court's] findings will be approved upon review. [24] We hold that plaintiff has established a proper purpose for its request to inspect some books and records. The scope of that inspection is a separate issue on which plaintiff bears the burden of specific justification.