On December 5, 2017, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied a motion for reargument concerning the Court’s rejection of a shareholder’s demand to inspect documents pertaining to alleged related-party transactions pursuant to 8 Del. C. § 220. Silverberg v. ATC Healthcare, Inc. C.A. No. 2017-0242-JRS (Del. Ch. Dec. 5, 2017). After a trial, the Court had rejected the request of plaintiff—a shareholder in ATC Healthcare, Inc. (“ATC”)—for books and records from ATC concerning alleged related-party transactions with Travel Healthcare Solutions, LLC (“Travel Healthcare”), an entity allegedly affiliated with ATC’s controlling shareholders. Denying plaintiff’s motion to reargue, the Court held that a change in contractual terms favorable to the related party “is not enough on its own to establish a credible basis of wrongdoing; something more is needed.”
Plaintiff pursued this litigation seeking multiple categories of documents from ATC pursuant to Section 220 of the Delaware General Corporation Law, 8 Del. C. § 220. In a post-trial decision, the Court granted plaintiff’s request as to documents related to the composition and independence of ATC’s directors and a particular stock option plan, but denied plaintiff’s request as to all documents concerning alleged related-party transactions with Travel Healthcare and other entities. According to plaintiff’s motion for reargument, in 2009, ATC entered an amendment to a 2006 agreement with Travel Healthcare, which improved the payment terms for Travel Healthcare, even though the original agreement had a 10-year term. Plaintiff argued that (i) standing alone, this amendment provided a credible basis to infer wrongdoing sufficient to support the granting of plaintiff’s books-and-records demand, and (ii) the Court overlooked this amendment in its trial decision.
The Court denied the motion on alternative grounds. First, the Court held that plaintiff’s argument was waived because plaintiff did not properly present it at trial. Second, the Court concluded that the new argument “still falls short of establishing a credible basis from which the Court can infer wrongdoing.” The Court explained that “plaintiff was obliged to present some evidence that the related-party transaction was unfair relative to a similar arm’s length transaction.” The Court was unpersuaded by plaintiff’s newly proffered comparison of contracts with the same alleged related party because it “reveals nothing of what the terms of a comparable arms-length agreement might be, much less how the insider contract, when compared to the arms-length contract, is unfair.”