On December 29, 2017, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery granted a stockholder’s demand to inspect books and records related to the acquisition of West Corporation (“West”) by Apollo Global Management (“Apollo”), pursuant to 8 Del. C. § 220. Lavin v. West Corp., C.A. No. 2017-0547-JRS (Del. Ch. Dec. 29, 2017). The Court found that plaintiff established a valid primary purpose for seeking inspection of the materials: to investigate whether West’s directors and officers breached their fiduciary duties under Revlon by approving the sale of West to Apollo when other bids indicated that a sale of West’s various business segments to different purchasers may have yielded greater value for West stockholders. Plaintiff alleged that the Apollo transaction was preferred because West’s CEO, directors, and financial advisor would receive greater compensation for a whole-company sale than a segmented sale. Importantly, the Court rejected West’s argument that Corwin v. KKR Fin. Holdings, LLC, 125 A.3d 304 (Del. 2015), precluded a § 220 demand because any possible breaches of fiduciary duties that plaintiff sought to investigate were cleansed by stockholder approval of the Apollo acquisition.
Following the consummation of the Apollo transaction, plaintiff served a § 220 demand on West to inspect its books and records to “determine whether wrongdoing and mismanagement had taken place” in connection with the transaction and “to investigate the independence and disinterestedness” of the company’s directors. West rejected plaintiff’s demand on the grounds that it was not for a proper purpose and was overly broad. Invoking Corwin, West also contended that the inspection demand was invalid because the West stockholders approved the transaction and, accordingly, any lawsuit for alleged breach of fiduciary duties (other than one for waste) would lack merit.
The Court rejected defendant’s use of Corwin in the § 220 context, stressing that a merits-based adjudication of the Corwin defense was improper. The Court relied on “settled” Delaware law that on a § 220 demand, a stockholder “need not prove that wrongdoing or mismanagement actually occurred,” meaning that the viability of the demand does not usually turn on the ultimate likelihood a claim will succeed.
The Court found that plaintiff’s anticipation of a Corwin-based defense was not one of the “rare circumstances” that warranted denial of a demand, observing that access to books and records is even more important when plaintiff’s pleading burden in a future plenary lawsuit would be higher (as would be required to overcome Corwin). The Court also found that plaintiff met the burden of presenting “some evidence of mismanagement or wrongdoing” necessary to establish a valid primary purpose. The Court noted, among other things, that there was a credible basis to infer that a sale of West’s business segments would have provided the most value to stockholders, and that directors and officers may have been financially incentivized to approve a sale of the whole company. However, the Court found plaintiff’s § 220 request to be overbroad (e.g., plaintiff requested all books and records reflecting communications between the Company’s board and any potential acquiror), and restricted the request to the relevant time period (January 2016 through July 2017) and to five specific categories of documents that were determined to be “necessary and essential.” Those categories were: (i) sum-of-the-parts analyses presented to the board by the company’s officers or by Centerview, the company’s financial advisor; (ii) all indications of interest, offers, term sheets, or draft agreements received by West for a sale of all or a portion of its business; (iii) board minutes related to the same; (iv) communications between the company, Centerview, and any potential acquiror related to a potential sale of one or more of the company’s segments; and (v) materials provided by the Board or any of its committees concerning the independence or disinterestedness of any director, including any disclosure questionnaires.
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