On February 27, 2017, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery dismissed for lack of standing a lawsuit for inspection of corporate books and records brought by a former stockholder squeezed out in a two-step merger. Weingarten v. Monster Worldwide Inc., C.A. No. 12931-VCG, 2017 WL 752179 (Del. Ch. Feb. 27, 2017). As noted by the Court, this case presented an issue of first impression: whether a plaintiff seeking corporate records under Section 220 of the Delaware General Corporation Law, 8 Del. C. § 220, must be a stockholder at the time the complaint is filed. Based on the language of the statute, the Court held that the former stockholder lacked standing to bring a Section 220 action because he no longer owned shares following the merger.
Monster Worldwide was acquired in a squeeze-out merger that closed on November 1, 2016. Plaintiff had been a shareholder whose shares were cancelled in the merger. Prior to closing, on October 19, 2016, plaintiff had sent a Section 220 letter to Monster, demanding to inspect the corporation’s books and records purportedly to assess whether litigation against Monster’s directors would be warranted in connection with the merger. Monster rejected the demand on October 26, 2016, but expressed a willingness to discuss the scope of a narrowly tailored production. Plaintiff responded later that day that he would abstain from filing a complaint pending the effort to negotiate a resolution of the demand. Plaintiff also wrote that he expected the company would not assert that he lost standing if the merger closed, and that the company should inform him by the next morning if that were not the case.
The company did not respond by the deadline plaintiff imposed but responded the following day, October 28, 2016, saying it would not agree to refrain from asserting any defense. On November 4, 2016, after the merger closed, Monster informed plaintiff that the demand “has been mooted.” Plaintiff filed suit thereafter.
Plaintiff argued that equitable estoppel should preclude the assertion that he lacked standing because defendant failed to reply by the deadline in plaintiff’s correspondence. Assuming without deciding that equitable estoppel could preclude consideration of a challenge to standing, the Court found estoppel inapplicable here. The Court explained that “there was no conduct by the party against whom the estoppel is sought on which the Plaintiff purports to rely, and to the extent it relied on Monster’s silence, that reliance is not reasonable.” Turning to the primary issue, the Court quoted from Section 220, which permits a stockholder, upon written demand, to inspect corporate records for “any proper purpose” and to obtain relief from the Delaware Court of Chancery if the demand is denied. 8 Del. C. § 220(b)-(c). Under the statute, the “stockholder shall first establish that . . . [s]uch stockholder is a stockholder; [and that] . . . [s]uch stockholder has complied with this section respecting the form and manner of making demand for inspection of such documents.” Id. § 220(c). Finding the language of the statute “plain and unambiguous,” the Court held that plaintiff lacked standing. Vice Chancellor Glasscock explained that “[b]y requiring that a plaintiff under Section 220, to seek relief from this Court, demonstrate both that it ‘has’—past tense—complied with the demand requirement, and that it ‘is’—present tense—a stockholder, the legislature has made clear that only those who are stockholders at the time of filing have standing to invoke this Court’s assistance under Section 220.” The Court also distinguished two cases raised by plaintiff, Cutlip v. CBA Int’l, Inc. I, 1995 WL 694422 (Del. Ch. Oct. 27, 1995), and Deephaven Risk Arb Trading Ltd. v. UnitedGlobalCom, Inc., 2005 WL 1713067 (Del. Ch. July 13, 2005). These cases, the Court found, involved plaintiffs that were still shareholders when they brought their actions but lost their stock through mergers while their cases were pending.
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