IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
AVERY L. WOODS, TRUSTEE OF )
THE AVERY L. WOODS TRUST, )
)
Plaintiff, )
)
v. ) C.A. No. 2020-0153-JTL
)
SAHARA ENTERPRISES, INC., )
)
Defendant. )
MEMORANDUM OPINION
Date Submitted: May 21, 2020
Date Decided: July 22, 2020
Paul J. Lockwood, Bonnie W. David, SKADDEN, ARPS, SLATE, MEAGHER & FLOM
LLP, Wilmington, Delaware; Charles F. Smith, SKADDEN, ARPS, SLATE, MEAGHER
& FLOM LLP, Chicago, Illinois; Attorneys for Plaintiff.
Ashley R. Altschuler, Harrison S. Carpenter, MCDERMOTT WILL & EMERY LLP,
Wilmington, Delaware; Attorneys for Defendant.
LASTER, V.C.
Defendant Sahara Enterprises, Inc. (the “Company”) operates as a privately held
investment fund. Plaintiff Avery L. Woods is the trustee of the Avery L. Woods Trust (the
“Trust”), which owns 278 shares of the Company’s common stock.
In recent years, the Company’s investments have consistently underperformed
broad market indices. Woods became concerned that the Company was paying its officers
and directors, paying highly compensated fund managers, and paying professional
consultants to help select the fund managers, yet achieving subpar results.
Woods wanted to understand the value of her shares. She also wanted to investigate
whether the Company’s underperformance was due to mismanagement or a lack of
oversight.
Woods served a demand for books and records under Section 220 of the Delaware
General Corporation Law. The Company provided Woods with a list of its stockholders
and a copy of its bylaws. The Company otherwise refused her request, contending that she
lacked a proper purpose. Alternatively, the Company argued that the scope of her demand
was overly broad. After further negotiations, the Company provided Woods with a
summary of the director’s fees received by the individuals who served on the boards of
directors of the Company and its sister entity, SMCO, Inc. The Company refused to provide
any other information.
Woods brought this action to enforce her statutory inspection rights. Woods proved
that she has proper purposes to conduct an inspection, and she established her right to
inspect certain categories of documents.
I. FACTUAL BACKGROUND
The case was tried on a paper record comprising 122 exhibits. The following facts
were proven by a preponderance of the evidence.1
A. The Company
The Company is a privately held Delaware corporation with its headquarters in
Chicago, Illinois. It operates as a closed-end investment fund for the descendants of Frank
H. Woods. See JX 24. The Company has fifty-six stockholders, all of whom are members
of the Woods family. JX 4 at ’14650.
The Company does not directly own any investments. It is a holding company that
owns a 99% member interest in Sahara Investments, LLC, which in turn holds various
securities. JX 23 at ’578. SMCO is the managing member of Sahara Investments and the
holder of its remaining member interest. Id.
The current three-entity structure is traceable to a reorganization completed in 2001.
Before the reorganization, SMCO and Sahara Investments did not exist. The Company
owned its investments directly or through wholly owned subsidiaries. See JX 23.
The reorganization was designed to achieve tax benefits by separating the ownership
of the Company’s investments from the management, administrative, and investment
functions. JX 23; JX 24 at ’586. To achieve that goal, the Company formed SMCO and
1
Citations in the form “Tr.” refer to the trial transcript. Citations in the form “JX —
at —” refer to trial exhibits; page citations refer to the last three digits of the control or JX
number.
2
Sahara Investments as wholly owned subsidiaries. JX 23 at ’578; JX 24 at ’586. The
Company transferred its employees and management functions to SMCO and its assets to
Sahara Investments. JX 24 at ’586. The Company then distributed all of its shares in SMCO
to the stockholders of the Company, making SMCO a “sister company,” rather than a
subsidiary. Id.
There is no ready market for the Company’s shares. Transfer is also restricted by
provisions in stockholder agreements to which Woods and other stockholders are parties.
See Tr. 97.
As a small, privately held corporation, the Company is not obligated to make
disclosures under the federal securities laws. Each year, the Company nevertheless
provides its stockholders with an annual report that includes audited financial statements.
See, e.g., JX 16; JX 22; JX 25. The Company also hosts an annual meeting of stockholders
and provides the stockholders with presentations on the Company’s performance. See, e.g.,
JX 14; JX 15; JX 17; JX 18.
The presentations and annual reports provide information about the Company and
SMCO on a consolidated basis. The materials treat the two entities as a single company.
B. Woods Becomes Concerned About Her Investment.
The Trust is a revocable trust settled under the laws of the State of Florida. JX 1 at
’002, ’027. The Trust is the record owner of 278 shares of Company common stock. JX 4
at ’149. Woods is the trustee of the Trust.
Over the past several years, Woods became concerned about the Trust’s investment
in the Company. The Company has six portfolios, categorized as “Domestic Equity,”
3
“Developed International Equity,” “Emerging Markets Equity,” “Marketable Alternative
Assets,” “Non-Marketable Alternative Assets,” and “Cash and Fixed Income.” JX 15 at
’227. The limited information provided by the Company suggests that its portfolios have
underperformed broad market indices. For instance, the Company’s 2018 annual report
noted that the Company’s “total return in 2018 was . . . -20 basis points (bp) behind the
S&P 500 Index,” its “domestic equity return of -9.36% was -498 bp behind the S&P 500
Index,” its “program of hedge funds produced a negative return that fell short of long-term
expectations,” and its “debt was a drag on overall performance in 2018 as loan interest cost
exceeded the overall portfolio return.” JX 16 at ’275–76. The presentation that Company
management gave during the same year indicated that the Company had underperformed
the S&P 500 over a one-year, three-year, five-year, and ten-year period. JX 18 at ’368.
In 2018, the Company paid seven outside investment managers to manage its
“Domestic Equity” portfolio. JX 16 at ’276. The Company paid multiple outside
investment managers to manage its other portfolios as well. Id. at ’276–78.
The Company pays compensation to directors, officers, and employees to manage
the managers who manage its investment portfolios. See JX 23 at ’579. The Company
represented in this action that SMCO employs between thirty and fifty people. See JX 23;
Tr. 96. The Company also hires consultants to help identify and select portfolio managers.
See Tr. 110. Woods views these arrangement as forcing the Company to pay fees on top of
fees on top of compensation. See Tr. 109. Woods believes that Sahara stockholders could
achieve better results at a lower cost by investing in index funds. See JX 18 at ’368; Tr. 15.
4
The Company has not provided information about its investment strategies, director
and officer compensation, or related-party transactions. See, e.g., JX 16; JX 18.
Stockholders have been left in the dark, without any information about the potential reasons
for the Company’s poor performance.
C. The Section 220 Demand
On August 8, 2019, acting on behalf of the Trust, Woods sent the Company a
demand for books and records. See JX 2 (the “Demand”). The Demand identified three
purposes for the inspection:
(1) to obtain names and addresses of Company stockholders to enable [the
Trust] to communicate with its fellow Company stockholders on matters
relating to their mutual interests as stockholders,
(2) to ascertain the value of its interests in the Company, which is privately
held and about which public information is therefore unavailable, and
(3) to monitor the directors and officers of the Company to ensure that they
act in compliance with their fiduciary duties and have not engaged in any
undisclosed self-dealing.
Id. at ’199–’200 (formatting added). The Demand asked for twelve categories of
information. Id. at ’198–99. The specific requests appear and are addressed in the Legal
Analysis. See infra Part II.B.
The Company agreed to provide Woods with the “names and addresses of the
Company’s current record stockholders” and “a copy of the current Bylaws of the
Company.” JX 4 at ’143. The Company otherwise rejected the Demand.
In October 2019, Woods asked the Company to reconsider its rejection of the
Demand and produce additional books and records. In December, “as a gesture of good
will,” the Company provided Woods with “a confidential summary of its directors’
5
compensation for the last five annual terms.” JX 6 at ’177. The Company otherwise
reiterated its rejection of the Demand.
D. This Litigation
On March 2, 2020, Woods filed this action. The Company answered and raised
seven affirmative defenses. Dkt. 7. The first affirmative defense stated, “Plaintiff’s
Complaint should be dismissed as moot because Sahara is a non-operating holding
company that lacks many of the ‘books and records’ sought by Plaintiff.” Id. at 19. It is not
clear how lacking many documents would render the action “moot.” Regardless, that was
the Company’s position.
On April 3, 2020, the parties had a call to discuss the answer, including the first
affirmative defense. JX 7; see also Dkt. 10 at 34. The Company represented that it could
not access many of the books and records sought in the Demand because they were held
by SMCO. The Company took the position that it had no right, contractual or otherwise, to
obtain books and records held by SMCO. See Dkt. 10 at 3.
By letter dated April 21, 2020, the Company raised its “mootness” defense with the
Court, asking to defer trial and arguing that Woods should serve a separate demand on
SMCO. Dkt. 10. The Company represented as follows:
As plaintiff has known (for years), SMCO -- not [the Company] -- makes the
investment management decisions for [Investments]. SMCO also hires all
personnel responsible for operating the investment business. [The Company]
is a holding company, including its ~99% ownership interest in [Sahara
Investments]. . . . Thus, Ms. Woods’s demand to investigate alleged
mismanagement in connection with the “investment business” and to value
her shares should have been directed to SMCO, not [the Company].
6
Id. at 23 (emphasis in original). The Company represented that “SMCO is a separate legal
entity not controlled by [the Company], with its own board, corporate formalities and
governance documents. Accordingly, [the Company] is not able to agree to produce
SMCO’s documents in a Section 220 action, as that decision belongs only to SMCO.” Id.
at 5.
A trial on a paper record took place on May 21, 2020. At trial, the Company stood
by its position that it might not have any responsive documents. Tr. 9697, 123.
II. LEGAL ANALYSIS
Section 220(b) of the Delaware General Corporation Law grants “[a]ny
stockholder” the right “to inspect for any proper purpose . . . [t]he corporation’s stock
ledger, a list of its stockholders, and its other books and records . . . .” 8 Del. C. § 220(b).
“Section 220 is now recognized as ‘an important part of the corporate governance
landscape.’” Seinfeld v. Verizon Commc’ns, Inc., 909 A.2d 117, 120 (Del. 2006) (quoting
Sec. First Corp. v. U.S. Die Casting & Dev. Co., 687 A.2d 563, 571 (Del. 1997)).
To obtain books and records under Section 220(b), the plaintiff must establish by a
preponderance of the evidence (i) its status as a stockholder, (ii) compliance with the
statutory requirements for making a demand, and (iii) a proper purpose for conducting the
inspection. Cent. Laborers Pension Fund v. News Corp., 45 A.3d 139, 144 (Del. 2012).
After meeting these requirements, the plaintiff must demonstrate by a preponderance of the
evidence that “each category of books and records is essential to accomplishment of the
stockholder’s articulated purpose for the inspection.” Thomas & Betts Corp. v. Leviton
7
Mfg. Co., 681 A.2d 1026, 1035 (Del. 1996). The disputed issues in this case are whether
the Trust has a proper purpose and the scope of the inspection.
A. The Trust’s Purposes
“The paramount factor in determining whether a stockholder is entitled to inspection
of corporate books and records is the propriety of the stockholder’s purpose in seeking such
inspection.” CM & M Gp., Inc. v. Carroll, 453 A.2d 788, 792 (Del. 1982). In the language
of the statute, “[a] proper purpose shall mean a purpose reasonably related to such person’s
interest as a stockholder.” 8 Del. C. § 220(b).
“There is no shortage of proper purposes under Delaware law . . . .” Melzer v. CNET
Networks, Inc., 934 A.2d 912, 917 (Del. Ch. 2007). Prior cases have recognized that a
stockholder can state a proper purpose by seeking
to investigate allegedly improper transactions or mismanagement;
to clarify an unexplained discrepancy in the corporation’s financial statements
regarding assets;
to investigate the possibility of an improper transfer of assets out of the corporation;
to ascertain the value of his stock;
to aid litigation he has instituted and to contact other stockholders regarding
litigation and invite their association with him in the case;
“[t]o inform fellow shareholders of one’s view concerning the wisdom or fairness,
from the point of view of the shareholders, of a proposed recapitalization and to
encourage fellow shareholders to seek appraisal”;
“to discuss corporate finances and management’s inadequacies, and then, depending
on the responses, determine stockholder sentiment for either a change in
management or a sale pursuant to a tender offer”;
to inquire into the independence, good faith, and due care of a special committee
formed to consider a demand to institute derivative litigation;
8
to communicate with other stockholders regarding a tender offer;
to communicate with other stockholders in order to effectuate changes in
management policies;
to investigate the stockholder’s possible entitlement to oversubscription privileges
in connection with a rights offering;
to determine an individual’s suitability to serve as a director;
to obtain names and addresses of stockholders for a contemplated proxy solicitation;
or
to obtain particularized facts needed to adequately allege demand futility after the
corporation has admitted engaging in backdating stock options.
City of Westland Police & Fire Ret. Sys. v. Axcelis Techs., Inc., 1 A.3d 281, 289 n.30 (Del.
2010) (emphasis omitted, formatting altered to add bullets, and internal footnotes omitted)
(quoting Edward P. Welch et al., Folk on the Delaware General Corporation Law,
Fundamentals § 220.6.3, at GCL-VII-202 to -206 (2009 ed.)).
Valuing The Trust’s Shares
The most straightforward purpose in the Demand is “to ascertain the value of [the
Trust’s] interests in the Company.” JX 2 at ’199. Woods has established that she holds this
purpose and is entitled to an inspection.
“Valuation of a stockholder’s investment in a corporation, particularly where the
corporation is privately held, has long been recognized as a proper purpose under 8 Del. C.
§ 220.”2
2
Thomas & Betts Corp. v. Leviton Mfg. Co., 685 A.2d 702, 713 (Del. Ch. 1995),
aff’d, 681 A.2d 1026 (Del. 1996); see also CM & M Gp., 453 A.2d at 792 (“[T]he valuation
of one’s shares is a proper purpose for the inspection of corporate books and records.”);
9
Because they do not receive the mandated, periodic disclosures associated
with a publicly held corporation, minority shareholders in a privately held
corporation face certain unique risks. Such shareholders may, therefore, have
a legitimate need to inspect the corporation’s books and records to value their
investment, in order to decide whether to buy additional shares, sell their
shares, or take some other action to protect their investment.
Thomas & Betts, 685 A.2d at 713. The Court of Chancery “has recognized on several
occasions that because of the absence of a publicly traded market, a shareholder in a closely
held corporation has no ability to value his or her shares, yet would need to make an initial
valuation, if only to determine whether the shares are marketable, and if so, at what price.”3
Here, the Trust is a stockholder of the Company, which is privately held. Woods
seeks books and records, in part, so that she “can ascertain the value of [the Trust’s]
interests in the Company.” Dkt. 13 at 3. That is a valid purpose.
Quantum Tech. P’rs IV, L.P. v. Ploom, Inc., 2014 WL 2156622, at *8 (Del. Ch. May 14,
2014) (“It is settled law that the valuation of one’s shares is a valid purpose to inspect books
and records.”); Madison Ave. Inv. P’rs, LLC v. Am. First Real Estate Inv. P’rs, L.P., 806
A.2d 165, 174 (Del. Ch. 2002) (“It is settled law in Delaware that valuation of one’s shares
is a proper purpose for the inspection of corporate books and records.” (internal quotation
marks omitted)).
3
Id. at 713 n.10 (collecting authorities); see also Bosse v. WorldWebDex Corp.,
2009 WL 2425718, at *1 (Del. Ch. July 30, 2009) (noting that a stockholder’s purpose of
“determining the value of his stock” is “a clearly proper purpose when, as here, a
company’s stock is not publicly listed or otherwise traded in a market where valuation
determinations can be readily made”); Macklowe v. Planet Hollywood, Inc., 1994 WL
560804, at *4 (Del. Ch. Sept. 29, 1994) (“When a minority shareholder in a closely held
corporation whose stock is not publicly traded needs to value his or her shares in order to
decide whether to sell them, normally the only way to accomplish that is by examining the
appropriate corporate books and records.”).
10
In response, the Company argues that Woods failed to prove “that she actually has
an intent to use the requested books and records” to value her shares. Dkt. 14 at 25
(emphasis in original). The Company maintains that a “mere incantation of an accepted
‘valuation’ purpose in a private corporation is [not] sufficient.” Dkt. 23 at 14. According
to the Company, a stockholder must demonstrate “why she needs to value shares.” Dkt. 14
at 3 (emphasis added). The Company argues that Woods had to point to some reason for
valuing her shares, such as evidence that she has a desire “to sell her shares, buy out another
family member, personal estate planning, apply for credit, make an offer to purchase the
Company, or none of the above.” Id. at 25.
The Company’s position is contrary to Delaware law. It would require that a
stockholder establish both a proper purpose (valuing shares) and an end use for the
resulting valuation. Delaware law does not require that a stockholder establish both a
purpose for seeking an inspection and an end to which the fruits of the inspection will be
put. Cf. Lebanon Cty. Emps.’ Ret. Fund v. AmerisourceBergen Corp., 2020 WL 132752,
at *11–14 (Del. Ch. Jan. 13, 2020). It is sufficient under Delaware law that a stockholder
has a proper purpose reasonable related to its interests as a stockholder, such as valuing its
shares. See 8 Del. C. § 220(b).
Delaware precedent explicitly rejects the Company’s position. A plaintiff’s purpose
“to value her shares” in the company “is clearly related to her interest as a stockholder of
[the company], and is therefore legally proper under 8 Del. C. § 220(b).” Macklowe, 1994
WL 560804, at *4 (citing CM & M Gp., 453 A.2d at 79293; Radwick Pty., Ltd. v. Med.,
Inc., 1984 WL 8264 (Del. Ch. Nov. 7, 1984)). “There is no requirement that [a stockholder]
11
must, in addition [to stating a valuation purpose], have taken concrete steps to sell her
shares in order to rely upon that purpose as a basis for seeking inspection under § 220.” Id.
Instead, once a stockholder has identified a proper purpose, such as valuing shares,
the burden shifts to the corporation to prove that the stockholder’s avowed purpose is not
her actual purpose and that her actual purpose for conducting the inspection is improper.
See Pershing Square, L.P. v. Ceridian Corp., 923 A.2d 810, 817 (Del. Ch. 2007). “This
showing is not made where a secondary improper purpose exists. Instead, in order to
succeed, the defendant must prove that the plaintiff pursued its claim under false pretenses,
and its primary purpose is indeed improper. Such a showing is fact intensive and difficult
to establish.” Id.
The Company relies on two cases to support its contention that a stockholder must
identify an end use for the valuation. Both involved efforts by a corporation to prove that
a stockholder had an improper purpose.
The first is Radwick, where the stockholder was an Australian-based investment
firm that had acquired a significant stake in a privately held medical company. See 1984
WL 8264, at *1. The investor “became concerned about the dilution of its holdings as a
result of private placements.” Id. The investor also became concerned that the company
was undertaking a major expansion in Australia without consulting with the investor or
taking advantage of its expertise. Id. The investor sought books and records to value its
shares. Id. at *2. The company contended that the investor’s purpose was pretextual and
that the investor was merely trying to harass the company. Id. at *3. In support of this
12
argument, the company pointed out that the investor admitted that it had not yet decided
whether to buy or sell its shares and might decide to do nothing. Id.
The court held that the investor’s valuation purpose was bona fide, explaining, “It
is settled law in Delaware that valuation of one’s shares is a proper purpose for the
inspection of corporate books and records. Furthermore, once a proper purpose is
established, any secondary purpose or ulterior motive is irrelevant.” Id. at *2 (citations
omitted). The court concluded that, “as stated in its demand letter, [the plaintiff sought] the
enumerated books and records in order to value its stock.” Id. at *3. The court observed
that the investor’s open-mindedness toward what to do with its shares was “only a
reflection of the business realities of any possible transaction where the party is not forced
to accept the deal regardless of its terms.” Id.
The Radwick decision does not suggest that a stockholder must have a sincerely held
valuation purpose and also show some external reason for needing a valuation. The
Radwick decision instead demonstrates that a stockholder only needs a sincerely held
valuation purpose.
The second case is Helmsman Management Services., Inc. v. A & S Consultants,
Inc., 525 A.2d 160 (Del. Ch. 1987). There, the stockholder had invested in a privately held
corporation as part of a business deal that also included a license agreement, which the
court labeled the “1983 Agreement.” Id. at 161. When the stockholder sought books and
records to value its shares, the corporation maintained that the stockholder did not have a
proper purpose, claiming that the stockholder “seeks to gather evidence to support a
potential claim to recover monies under the 1983 Agreement.” Id. at 164. There was some
13
evidence to support this possibility, and the court expressed concern that the stockholder’s
valuation purpose “is, at the present time, somewhat academic.” Id. at 165. In that context,
the court observed that it was “not sufficient for [the stockholder] merely to assert that it
would like to value [its] stock. Without a showing of a present need for such a valuation, a
mere statement of that purpose, though valid in law, might not be bona fide in fact.” Id.
After reviewing the evidence, the Helmsman court concluded that the stockholder’s
valuation purpose was bona fide, even though the stockholder had “made no decision to
dispose of [its] stock, [had] taken no steps to market that stock, and [had] no potential buyer
for it.” Id. In accepting the stockholder’s valuation purpose, the court relied on the
circumstances that typically confront a stockholder in a small, privately held company:
There is a very limited market for [the] stock; indeed, given the corporation’s
right of first refusal, the only potential buyer may be [the corporation itself].
For that reason, [the stockholder] must necessarily resort to [the
corporation’s] books and records to establish a value as a predicate for
deciding whether its stockholdings are marketable and, if so, on what terms.
Those considerations, plus [the stockholder’s] interest in extricating itself
from a minority stockholder position in a corporation with which it is no
longer in a friendly relationship, persuade me that [the stockholder’s]
valuation purpose is valid in fact as well as in law.
Id. Like Radwick, Helmsman did not hold that stockholder must demonstrate a need to
value her shares to satisfy her burden under Section 220. The Helmsman decision instead
reflects the settled proposition of law that a valuation purpose must be bona fide.
As Radwick and Helmsman show, Section 220 does not require a stockholder to say
why it seeks to value its shares. But this does not make the stockholder’s intentions
irrelevant. If a defendant argues that a stockholder has an improper purpose and has
evidence to support its assertion, then a stockholder can point to how it plans to use the
14
valuation as evidence that its claimed purpose is its actual purpose. If a stockholder cannot
identify a credible potential end use, then the court may infer that the stockholder’s stated
purpose is not its actual purpose. See Marathon P’rs, L.P. v. M & F Worldwide Corp., 2004
WL 1728604, at *8 (Del. Ch. July 30, 2004). Or, as in Radwick, Helmsman, and other
cases, the court may credit the stockholder’s valuation purpose. See Kortüm v. Webasto
Sunroofs, Inc., 769 A.2d 113, 123 (Del. Ch. 2000) (holding that the fact that the plaintiff
“has not yet decided whether (or not) to purchase or sell, [does] not—alone and without
more—defeat the factual bona fides of its valuation purpose”).
In the Demand, Woods averred that she wanted “to ascertain the value of [the
Trust’s] interests in the Company.” JX 2 at ’199. She did not describe what she might do
with the valuation, but that is not required. She later indicated that she may sell her shares.
Dkt. 13 at 28, 34. The circumstances she faces as a minority stockholder in a private
company that is underperforming render her verified assertion that she wishes to value her
shares more than sufficient.
The Company failed to prove that valuing the Trust’s shares was not Woods’ actual
purpose and that she in fact has some ulterior and improper purpose. The Company offered
no evidence on this point. The Company chose not to depose Woods, and it did not point
to any documents or circumstances that suggest an improper motive. See Tr. 22, 6162.
The Company only offered suspicions based on its professed inability to understand why
Woods might want books and records. See Tr. 57, 63, 91. Wondering why a stockholder
might want to value her shares, particularly when the stockholder has offered credible
reasons, is not enough to carry the Company’s burden.
15
Woods established that she has a proper purpose in seeking to value her shares. She
is entitled to inspect books and records in support of that purpose.
Investigating Wrongdoing Or Mismanagement
The Demand also cites a desire “to monitor the directors and officers of the
Company to ensure that they act in compliance with their fiduciary duties and have not
engaged in any undisclosed self-dealing.” JX 2 at ’199. In framing Woods’ purpose in this
fashion, the Demand departed from the more customary verbiage of “investigating
wrongdoing or mismanagement.” Based on Woods’ briefing and arguments at trial, this
decision construes her framing as synonymous with the customary version.
“It is well established that a stockholder’s desire to investigate wrongdoing or
mismanagement is a ‘proper purpose.’” Seinfeld, 909 A.2d at 121.
One of the most traditional proper purposes for a § 220 demand is the
investigation of possible wrongdoing by management. When a stockholder
has made a colorable showing of potential wrongdoing, inspecting the
company’s books and records can help the stockholder to ferret out whether
that wrongdoing is real and then possibly file a lawsuit if appropriate.
KT4 P’rs v. Palantir Techs. Inc., 203 A.3d 738, 758 (Del. 2019).
To obtain books and records to investigate corporate wrongdoing, a stockholder
must “show, by a preponderance of the evidence, a credible basis from which the Court of
Chancery can infer there is possible mismanagement that would warrant further
investigation . . . .” Seinfeld, 909 A.2d at 123. The stockholder need only establish by a
preponderance of the evidence that there is a credible basis from which the court can infer
16
a possibility of wrongdoing. “A stockholder is not required to prove by a preponderance of
the evidence that [wrongdoing] and mismanagement are actually occurring.”4
The “credible basis” standard is “the lowest possible burden of proof.” Seinfeld, 909
A.2d at 123. A plaintiff may meet it by making “a credible showing, through documents,
logic, testimony or otherwise, that there are legitimate issues of wrongdoing.” Id.; accord
Sec. First, 687 A.2d at 568. The plaintiff may rely on circumstantial evidence. Wal-Mart
Stores, Inc. v. Ind. Elec. Workers Pension Tr. Fund IBEW, 95 A.3d 1264, 1273 (Del. 2014).
The plaintiff also may rely on hearsay, as long as it is sufficiently reliable.5 A stockholder,
however, cannot obtain books and records simply because the stockholder disagrees with
a board decision, even if the decision turned out poorly in hindsight. See, e.g., Okla.
Firefighters Pension & Ret. Sys. ex rel. Citigroup, Inc. v. Corbat, 2017 WL 6452240, at
*18 (Del. Ch. Dec. 18, 2017) (collecting authorities).
Woods contends that that there is a credible basis to suspect wrongdoing because
the Company’s “investments have consistently underperformed key market indexes, while
4
Seinfeld, 909 A.2d at 123 (internal quotation marks omitted); accord Axcelis, 1
A.3d at 286–87 (“Such evidence need not prove that wrongdoing, in fact, occurred.”); Sec.
First, 687 A.2d at 565 (“The stockholder need not actually prove the wrongdoing itself by
a preponderance of the evidence.”); id. at 567 (“The actual wrongdoing itself need not be
proved in a Section 220 proceeding, however.”); Thomas & Betts, 681 A.2d at 1031
(“[Stockholders] are not required to prove by a preponderance of the evidence that waste
and [mis]management are actually occurring.”).
5
See Thomas & Betts, 681 A.2d at 1032–33; Marmon v. Arbinet-Thexchange, Inc.,
2004 WL 936512, at *4 (Del. Ch. Apr. 28, 2004); Skoglund v. Ormand Indus., Inc., 372
A.2d 204, 208–13 (Del. Ch. 1976).
17
the Company has steadfastly refused to provide information about the compensation that
the Company has paid to its officers, employees and other advisors charged with managing
those assets, let alone the Board’s process in approving that compensation.” Dkt. 13 at 29.
Standing alone, it is unlikely that this justification would have been sufficient to establish
a credible basis to suspect wrongdoing sufficient to conduct an inspection. The Company’s
poor performance, without more, has not been sufficiently protracted or extreme to draw
an inference of wrongdoing.
During this litigation, however, the Company took a position that bolstered Woods’
investigative purpose. In its answer to the complaint, the Company asserted as an
affirmative defense that Woods’ complaint “should be dismissed as moot because Sahara
is a non-operating holding company that lacks many of the ‘books and records’ sought by
Plaintiff.” Dkt. 7 at 19. When Woods sought to understand this affirmative defense, the
Company maintained that its books and records were held by SMCO, not the Company.
The Company further claimed that the Company had no right, contractual or otherwise, to
access books and records held by SMCO. See Dkt. 10 at 3.
Woods pressed forward with the litigation, hoping to obtain whatever responsive
books and records that the Company had. The Company then raised its “mootness” defense
with this court, arguing that “SMCO -- not [the Company] -- makes the investment
management decisions for [Sahara Investments]” and that “SMCO also hires all personnel
responsible for operating the investment business.” Dkt. 10 at 23 (emphasis in original).
The Company represented that it had no control over SMCO and no ability to obtain
18
documents. See id. at 5. At trial, the Company reiterated that it might not have any
documents. Tr. 9697, 123.
By taking this position, the Company sought to gain a short-term tactical advantage
in the Section 220 action. But pursuing this strategy gave rise to two bases to suspect
possible wrongdoing.
First, the Company’s position facially conflicted with the representations that it
made to its stockholders in connection with the reorganization that resulted in the creation
of SMCO. When soliciting stockholder approval, the Company represented that the
reorganization would not have any effect on the ability of stockholders to obtain
information from the Company. See Part II.B.3, infra. The contrast between the Company’s
current position and its representations to stockholders provides a credible basis to suspect
that the Company’s directors and officers have engaged in wrongdoing by failing to
manage the Company in the manner that they committed that they would.
Second, by representing that the Company did not have any responsive books and
records, the Company created a credible basis to suspect that the Company’s directors have
abdicated their statutory responsibilities. If the Company’s board of directors relied on
SMCO, then the Company should have, at a minimum, books and records documenting the
board’s good faith reliance on and active oversight of SMCO. Presumably there would be
books and records showing how the Board ensured that SMCO managed the Company’s
assets responsibly, such as standards or policies that the board established for SMCO to
follow and a record of the board monitoring SMCO’s performance. Yet according to
Company counsel, the Company may not have any documents responsive to the Demand.
19
Directors of a Delaware corporation owe two fiduciary duties—care and loyalty.6
The duty of loyalty includes a requirement to act in good faith, which is “a subsidiary
element, i.e., a condition, of the fundamental duty of loyalty.” Stone, 911 A.2d at 370
(internal quotation marks omitted). The duty of loyalty and its subsidiary element of good
faith require that directors pursue the best interests of the corporation and its stockholders.
See In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 52–53 (Del. 2006); Gagliardi v.
TriFoods Int’l, Inc., 683 A.2d 1049, 1051 n.2 (Del. Ch. 1996). Directors must take active
steps to oversee the operations of the corporation and become informed about the risks
confronting the company. In the words of the seminal oversight case, directors must
“attempt in good faith to assure that a corporate information and reporting system, which
the board concludes is adequate, exists.” See In re Caremark Int’l Inc. Deriv. Litig., 698
A.2d 959, 970 (Del. Ch. 1996); accord Stone, 911 A.2d at 36465, 368–69.
It is, of course, permissible for a board of directors to delegate management
responsibilities to officers, employees, and outside advisors. What the board invariably
retains—and must fulfill—is the obligation of oversight. It would be an exceptional board
of directors that could satisfy its duty of oversight without creating any books and
records—no minutes, no resolutions, no actions by written consent, no reports, no policies,
6
See, e.g., Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 370 (Del.
2006); accord Mills Acq. Co. v. Macmillan, Inc., 559 A.2d 1261, 1280 (Del. 1989)
(“[D]irectors owe fiduciary duties of care and loyalty to the corporation and its
shareholders.”); Polk v. Good, 507 A.2d 531, 536 (Del. 1986) (“In performing their duties
the directors owe fundamental fiduciary duties of loyalty and care to the corporation and
its shareholders.”).
20
no nothing. Yet that is what the Company claimed by arguing that this action was “moot”
because the Company did not have any responsive books and records.
The Company’s own arguments thus established a credible basis to suspect
corporate wrongdoing. Woods has therefore established a proper purpose for an inspection.
Communicating With Stockholders
Woods’ remaining purpose is “to communicate with its fellow Company
stockholders on matters relating to their mutual interests as stockholders . . . .” JX 2 at ’199.
As framed in the Demand, this purpose only applied to Woods’ request for the “names and
addresses of Company stockholders.” Id. The Company produced a stock list in August
2019, rendering this issue moot. See Tr. 21.
In her briefing, Woods sought to expand her communication purpose and rely on it
to obtain other books and records. She described her communication purpose as “directly
related to her valuation and investigation purposes.” Dkt. 13 at 27; see Tr. 33. She did not
say specifically what she wanted to tell other stockholders, explaining that whether she
wanted to communicate and what she would say would depend on “what is revealed
through her inspection.” See Dkt. 22 at 13.
Under these circumstances, the proper analytical framework for analyzing the
Demand is through Woods’ valuation and investigation purposes. Woods seeks to value
the Trust’s shares and explore corporate wrongdoing, and if she learns anything significant,
then she may want to communicate with stockholders about it. It is perhaps possible that
there could be a case in which a communication purpose could support an independent
inspection, but this decision need not consider that issue.
21
B. The Scope Of The Inspection
Because the plaintiffs have met the test for an inspection, this court must determine
its scope. Sec. First, 687 A.2d at 569. The production of records in response to a Section
220 demand is not the equivalent of discovery in a plenary action. Id. The Section 220
plaintiff must establish “that each category of the books and records requested is essential
and sufficient to [its] stated purpose.” Thomas & Betts, 681 A.2d at 1035. “[T]he court
must give the petitioner everything that is ‘essential,’ but stop at what is ‘sufficient.’”
Palantir, 203 A.3d at 752 (internal quotation marks omitted). At bottom, the plaintiff
should receive “access to all of the documents in the corporation’s possession, custody or
control, that are necessary to satisfy [the plaintiff’s] proper purpose.” Saito v. McKesson
HBOC, Inc., 806 A.2d 113, 114–15 (Del. 2002).
When tailoring the production order, the court must balance the interests of the
stockholder and the corporation. See Sec. First, 687 A.2d at 569. When “a plaintiff has
shown evidence of wide-ranging mismanagement or waste, a more wide-ranging
inspection may be justified.” Freund v. Lucent Techs., Inc., 2003 WL 139766, at *5 (Del.
Ch. Jan. 9, 2003); accord Skoglund, 372 A.2d at 211. “[W]here a § 220 claim is based on
alleged corporate wrongdoing, and assuming the allegation is meritorious, the stockholder
should be given enough information to effectively address the problem, either through
derivative litigation or through direct contact with the corporation’s directors and/or
stockholders.” Saito, 806 A.2d at 114–15. “The source of the documents and the manner
in which they were obtained by the corporation have little or no bearing on a stockholder’s
22
inspection rights. The issue is whether the documents are necessary and essential to satisfy
the stockholder’s proper purpose.” Id. at 118.
The starting point (and often the ending point) for an adequate inspection will be
board-level documents that formally evidence the directors’ deliberations and decisions
and comprise the materials that the directors formally received and considered (the “Formal
Board Materials”).7 A corporation should be able to collect and provide its Formal Board
Materials promptly and with minimal burden. In many organizations, the corporate
secretary maintains a central file for each board meeting in either paper or electronic form
that contains the minutes and other Formal Board Materials for that meeting.8
7
See Cook v. Hewlett-Packard, 2014 WL 311111, at *4 (Del. Ch. Jan. 30, 2014)
(limiting inspection to “board-level” documents relating to an acquisition and subsequent
problems with the acquired company); Robotti & Co. v. Gulfport Energy Corp., 2007 WL
2019796, at *4 (Del. Ch. July 3, 2007) (permitting inspection of board minutes); Grimes v.
DSC Comms. Corp., 724 A.2d 561, 567 (Del. Ch. 1998) (“[T]he right to obtain corporate
records [to investigate demand refusal] focuses on the committee process itself and extends
at least to reports or minutes, reflecting the corporate action,” including “copies of the
Special Committee’s report, minutes of the meetings of the Special Committee and minutes
of any meeting of the board of directors relating to the creation or functioning of the Special
Committee, including any meeting of the board of directors at which the recommendation
of the Special Committee was considered or approved” (footnote and internal quotation
marks omitted)); see also Axcelis, 1 A.3d at 291 (observing that if a board declines to accept
a director resignation under a system of majority voting with a board-rejectable resignation,
then a stockholder can obtain through a Section 220 inspection “any documents and other
records upon which the board relied”).
8
See, e.g., 3 William B. Solomon & Michael A. Nemeroff, Practice Checklist,
Successful Partnering Between Inside & Outside Counsel § 46A:31 (2015) (“In connection
with the corporate secretary’s role as the company’s record keeper, the corporate secretary
often maintains the official minutes of the meetings of the board in a central location. . . .
The corporate secretary generally prepares board packages or gathers them from the
applicable members of management, reviews what is gathered to ensure it is narrowly
23
If the plaintiff makes a proper showing, an inspection may extend to informal
materials that evidence the directors’ deliberations, the information that they received, and
the decisions they reached (“Informal Board Materials”). Informal Board Materials
generally will include communications between directors and the corporation’s officers
and senior employees, such as information distributed to the directors outside of formal
channels, in between formal meetings, or in connection with other types of board
gatherings. Informal Board Materials also may include emails and other types of
communication sent among the directors themselves, even if the directors used non-
corporate accounts. See Palantir, 203 A.3d at 742, 753; Amalgamated Bank v. Yahoo! Inc.,
132 A.3d 752, 793 (Del. Ch. 2016), abrogated on other grounds by Tiger v. Boast Apparel,
Inc., 214 A.3d 933 (Del. 2019). In an appropriate case, an inspection may extend further to
encompass communications and materials that were only shared among or reviewed by
officers and employees (“Officer-Level Materials”). See Wal-Mart, 95 A.3d at 1273
(affirming order requiring production of Officer-Level Materials); see also Beam ex rel.
Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1056 (Del. 2004)
(explaining that Officer-Level Materials can be necessary to understand how “directors
tailored to the board’s purposes and disseminates the materials necessary for the board
members to review in advance of each meeting of the board.”); Soc’y of Corp. Sec’ys. &
Gov’ce Prof’ls, Corporation Minutes: A Publication for the Corporate Secretary 23–24
(Feb. 2014) (“Corporate secretaries may also maintain separate meeting files for each board
and committee meeting which includes the material related to the meeting and materials
referenced in the minutes. . . . Companies have also started storing these materials
electronically. . . .”).
24
handled [management] proposals or conduct in various contexts,” which could reveal
patterns of boardroom behavior).
The Categories Of Books And Records
Whether a stockholder is entitled to a particular category of documents “is fact
specific and will necessarily depend on the context in which the shareholder’s inspection
demand arises.” Wal-Mart, 95 A.3d at 1271 (internal quotation marks omitted). The
Demand sought twelve categories of books and records from the Company. The first two
requests sought:
(a) A copy of the current stock ledger and a current list of all
Company record and beneficial stockholders, as well as any information
regarding the mailing addresses, telephone numbers and email addresses of
any of the record or beneficial stockholders; [and]
(b) A correct and complete copy of the bylaws of the Company,
including any amendments thereto.
These requests were rendered moot when the Company produced its stock list and bylaws.
See Tr. 21.
The remaining ten requests can be grouped into four broad categories:
requests seeking financial information about the Company (requests (f), (g), and
(j));
requests seeking information about the Company’s investment strategies (requests
(c), (d), (e), and (h));
requests seeking information about compensation paid by the Company to its
directors, officers, and employees, as well as any interested-party transactions
25
between the Company and any directors, officers, employees, or stockholders of the
Company (request (i) and (l)); and
requests seeking information about compensation and fees paid by the Company to
its advisors (request (k)).
The specific requests are reproduced below.
Financial Information
Requests (f), (g), and (j) seek financial information about the Company, including
its financial reports, business plans, valuations, budgets, financial guidance, forecasts, and
projections. Request (f) seeks “[a]ll financial reports or summaries of the Company that
were provided to the Board or any committee thereof from January 1, 2015 to present.”
JX 2 at ’199. It thus seeks Formal Board Materials that speak to the Demand’s valuation
purpose. This request falls squarely within the heart of Section 220 and is granted.
Request (g) seeks “[m]onthly, quarterly or other periodic financial reports or
summaries of the Company generated by management from January 1, 2015 to present.”
Id. It thus seeks Officer-Level Materials. Woods did not distinguish between requests (f)
and (g), simply asserting that both “on their face are necessary and essential to Plaintiff’s
purpose of valuing the Trust’s shares.” Dkt. 13 at 31. Woods has not shown a need to go
beyond Formal Board Materials. If she receives Formal Board Materials and determines
that they are inadequate for her purpose, then she may renew her request for Officer-Level
Materials.
Request (j) seeks “[d]ocuments, correspondence, reports or drafts thereof
concerning any investment decision, business plan, valuation, budget, financial guidance,
forecast or projections concerning the Company from January 1, 2015 to present.” JX 2 at
26
’199. The request does not distinguish among Formal Board Materials, Informal Board
Materials, or Officer-Level Materials. The detailed nature of the request suggests that it
seeks all three.
As framed, request (j) is overly broad. In the abstract, “[t]he importance of forecasts
and projections to valuation of a company is so basic that it does not require citation.”
Quantum Tech., 2014 WL 2156622, at *12 (Del. Ch. May 14, 2014). Woods is therefore
entitled to inspect Formal Board Materials falling into this category. Woods has not proven
that Informal Board Materials or Officer-Level Materials concerning financial guidance,
forecasts, or projections are necessary and essential to her valuation purpose, and thus she
is not entitled to those materials. If she receives Formal Board Materials and determines
that they are inadequate for her purpose, then she may renew her request for Informal Board
Materials and Officer-Level Materials.
Investment Strategies
According to Woods, requests (c), (d), (e), and (h) seek information about the
Company’s investment strategies. Requests (c), (d), and (e) are actually much broader.
They seek
(c) All minutes of meetings of the Company’s Board of Directors
(the “Board”) or any committee thereof, including any attachments thereto,
from January 1, 2015 to present;
(d) All presentations, agendas, reports or other materials provided
to the Board or any committee thereof in preparation for, or review at, any
meetings from January 1, 2015 to present; [and]
(e) All notes taken at any meetings of the Board or any committee
thereof from January 1, 2015 to present.
27
JX 2 at ’198–99. These requests thus seek all of the Company’s Formal Board Materials
from January 1, 2015, to the present, plus Informal Board Materials in the form of notes.
Request (h) seeks a subset of the foregoing materials. It asks for
[a]ll materials created for or provided to the Board or any committee thereof
from January 1, 2015 to present concerning the Company’s investment
strategies, any actual or proposed changes to the mix or types of investments
made by the Company; returns from any investments; liquidity
considerations; or tax consequences of investments for the Company or its
stockholders.
Id. at ’199. Request (h) thus seeks Formal Board Materials relating to the Company’s
investment strategies, investment holdings, and related issues.
The blanket request to inspect all of a Company’s Formal Board Materials, plus
notes of all meetings, is not sufficiently targeted. Request (h) specifically requests Formal
Board Materials concerning the Company’s investment strategy and investments, which is
a core area of focus for the Demand. Books and records responsive to this request appear
sufficient for Woods’ purpose. The Company shall produce materials responsive to
Request (h). As to matters falling within the scope of Request (h), the Company shall
produce the types of materials called for by Requests (c), (d), and (e). The Company need
not produce materials that otherwise would be called for by Requests (c), (d), and (e), but
which do not relate to the topics covered in Request (h).
Insider Compensation And Interested-Party Transactions
Requests (i) and (l) seek information about the compensation and other benefits
received by the humans who control the Company. Request (i) focuses on compensation.
Request (l) focuses on interested-party transactions.
28
Request (i) asks for
[a]ll materials created for or provided to the Board or any committee thereof
from January 1, 2015 to present concerning compensation or remuneration
for directors, officers, managers or employees of the Company, including
documents sufficient to identify the total amount of compensation actually
paid or to be paid to any such director or officer in 2015, 2016, 2017, 2018
and 2019, and any employment or consulting agreement executed in
connection therewith.
JX 2 at ’199. The request thus seeks only Formal Board Materials. The Company already
has produced information about its director compensation, so the request only pertains to
Formal Board Materials relating to officer, manager, and employee compensation.
A request that seeks information about the compensation of every employee in the
Company is likely to be excessive. Because the request is limited to Formal Board
Materials, it is likely only to cover senior officers and employees whose compensation is
significant enough to warrant board consideration or approval.
Request (l) seeks
[d]ocuments, correspondence, reports or drafts thereof concerning any
“interested-party transactions,” including any transactions, contracts,
agreements or arrangements between the Company, on the one hand, and any
director, officer, employee or stockholder of the Company or any of their
immediate family members, associates or affiliated entities, on the other
hand.
Id. Request (l) is not limited to Formal Board Materials. By its terms, it also seeks Informal
Board Materials, Officer-Level Materials, or some combination of the three.
Woods is entitled to information on both topics, which are necessary and essential
to Woods’ valuation purpose. A valuation professional can use this information to make
normalizing adjustments to the extent necessary when valuing the firm. See, e.g., Zutrau v.
29
Jansing, 2014 WL 3772859, at *39 (Del. Ch. July 31, 2014); Reis v. Hazelett Strip-Casting
Corp., 28 A.3d 442, 470-73 (Del. Ch. 2011); In re Radiology Assocs., Inc., 611 A.2d 485,
490-91 (Del. Ch. 1991).
More fundamentally, how directors and senior officers are compensated and
whether they are the beneficiaries of any related-party transactions are basic facts that
stockholders are entitled to know. Section 220(b) defines a proper purpose as any purpose
reasonably related to the stockholder’s interest as a stockholder. Some information is so
foundational that a desire to have that information is itself a proper purpose.
A stockholder should be entitled to obtain a general description of the company’s
business, the identities of its directors and senior officers, and basic information about how
they are compensated. See KT4 P’rs LLC v. Palantir Techs., Inc., 2018 WL 1023155, at
*18 (Del. Ch. Feb. 22, 2018) (noting that stockholders “deserve basic information about
their investments” including “the identities of directors and officers and their dates of
service” and “books and records relating to [the company’s] annual stockholder
meetings”), rev’d in part, aff’d in relevant part, 203 A.3d 738 (Del. 2019). Directors and
officers are fiduciaries who have a duty to act loyally, in good faith, with due care to
maximize the long-term value of the corporation for the benefit of its residual claimants.
The residual claimants are entitled to know how their fiduciaries are taking money out of
the corporation. A stockholder should not have to point to a valuation purpose or assert
suspicions about corporate wrongdoing to be able to learn how much money the directors
and senior officers are receiving.
30
For a public company, the federal securities laws mandate that this information be
disclosed. See Regulation S-K, 17 C.F.R. § 229.401 (2020) (requiring disclosure of
information regarding directors, executive officers, and certain “significant employees”).
For a public company, that level of information is likely sufficient. See Seinfeld, 909 A.2d
at 120 (denying inspection for information going beyond publicly disclosed compensation
figures where stockholder did not have a credible basis to suspect possible wrongdoing).
When a company is privately held and does not provide disclosures on those subjects, a
Section 220 demand is the proper means of seeking the information.
This decision is not suggesting that a stockholder should be entitled to receive
compensation information for every officer in the company. Particularly in a large
company, courts will need to draw a reasonable line. Analogies to other sources of
authority may prove helpful, such as the federal securities laws, Section 3114(b) of Title
10, or the 2020 amendments to Section 145(e).
In this case, it is not necessary to draw fine lines. The Company is a small, privately
held corporation. It has a limited number of directors. It has a limited number of senior
officers. Before the Trust began its efforts to obtain books and records, the limited
information that the Company provided did not make clear who the Company’s directors
and officers were. The annual report that the Company provided each year presented a joint
picture of the Company and SMCO. The report identified directors and officers without
designating who served which entity. See, e.g., JX 16 at ’286; JX 22 at ’494; JX 25 at ’437.
In response to Woods’ requests, the Company provided information about its directors, but
declined to provide information about its officers. JX 6 at ’17980.
31
The Trust is entitled to know (i) who the Company’s senior officers are, (ii) how
much compensation they receive, and (iii) whether the Company has entered into related-
party transactions with any officers or directors. The Trust’s desire to know this
information is itself a proper purpose.
The Company argued in its briefing that Woods did not need any information about
interested transactions because of the information that the Company provided in its annual
reports from 2016 and 2017. According to the Company,
Under GAAP, self-dealing transactions, if material, are audited and disclosed
in the financial statements. Here, had the companies’ independent auditor,
KPMG, uncovered material self-dealing transactions during its annual audits,
the auditors would have either disclosed the discrepancies in their report or
refused to certify the financial statements. No self-dealing transactions were
ever reported by KPMG. Ms. Woods certainly does not allege that KPMG’s
audit reports are inaccurate, incomplete or compromised.
Dkt. 14 at 11 n.7. A corporation cannot strip its stockholders of their information rights by
pointing to its accountant, nor does the definition of materiality under GAAP establish the
standard for self-dealing under Delaware law. Woods is entitled to know whether the
Company’s fiduciaries have entered into related-party transactions with the Company and
to obtain books and records related to those transactions.
Woods only seeks Formal Board Materials relating to compensation. She seeks
more extensive information about related-party transactions, including Informal Board
Materials and Officer-Level Materials. In the first instance, Woods may inspect Formal
Board Materials about related-party transactions. If she determines that the Formal Board
Materials are inadequate for her purpose, then she may renew her request for Informal
Board Materials and Officer-Level Materials.
32
Advisor Compensation
Request (k) seeks information about compensation paid by the Company to its
advisors. It asks for
[d]ocuments, correspondence, reports or drafts thereof concerning any
payments made to any advisors (including legal, financial or investment
advisors), consultants or agents engaged by the Company from January 1,
2015 to present, including documents sufficient to identify the total amount
of payments made to any such advisor, consultant or agent in 2015, 2016,
2017, 2018 and 2019, and any engagement letters executed in connection
therewith.
JX 3 at ’199. It thus seeks Formal Board Materials, Informal Board Materials, and Officer-
Level Materials, although it indicates that Woods will be satisfied with information
“sufficient to identify the total amount of payments made to such advisor . . . .”
In its full flower, this request is overly broad. The decision to engage consultants or
advisors is ordinarily entrusted to the business judgment of the Board. See generally Brehm
v. Eisner, 746 A.2d 244, 261 (Del. 2000). A request for all documents concerning any
payment made to any advisor is more akin to discovery in plenary litigation than a Section
220 request.
Woods’ “sufficient to show” formulation, however, is adequately tailored.
Information sufficient to show the total amount of payments made annually to each advisor,
consultant, or agent will enable Woods or her valuation professional to make normalizing
adjustments, if warranted, to the Company’s expenses when valuing the firm. The level of
fees may also support a concern about corporate wrongdoing if it appears that the Company
is paying twice, once for internal management and once for external management.
33
The Covered Period
For nine of the ten requests, Woods sought documents from January 1, 2015, to the
present. For the request about interested transactions, Woods did not specify a time period.
Valuations are often based on historical trends, and a five-year period is common.
See, e.g., Dobler v. Montgomery Cellular Hldg. Co., 2001 WL 1334182, at *5–6 (Del. Ch.
Oct. 19, 2001) (ordering production of documents related to valuation purpose for five-
year period); Carroll v. CM&M Gp., Inc., 1981 WL 7626, at *5 (Del. Ch. Sept. 24, 1981)
(ordering inspection of, among other things, complete audited and financial statements for
a five-year period), aff’d, 453 A.2d 788 (Del. 1982). For the requests supported by a
valuation purpose, this time period makes sense. For other requests, five years is a
reasonable amount of time. Given the nature of the requests and the Company’s business,
the burden on the Company is likely to be low.
The Entities That Will Be Directed To Provide Books And Records
The final question is whether production is limited to the Company or whether it
will extend to other entities. “The rights of shareholders secured by § 220 cannot be
defeated simply by having another entity hold the records relating to [the corporation]
which [it] ordinarily would have.” Dobler, 2001 WL 1334182, at *10.
As a result of the reorganization from 2001, the Company owns a 99% member
interest in Sahara Investments. The Company’s “sister company,” SMCO, owns the other
1% and manages Sahara Investments. JX 23; JX 24 at ’586; Tr. 96–97.
34
When the Company engaged in the reorganization, it solicited approval from its
stockholders. JX 23. The memorandum distributed to stockholders contained the following
representations:
The reorganization “will not cause any change in the information available to
stockholders.” Id. at ’580.
“Although the [reorganization] adds certain complexities to [the Company’s] legal
structure, it will have no impact on individual stockholders other than the economic
benefits and tax savings” discussed in the memorandum. Id. at ’581.
Despite telling its stockholders that the reorganization would “not cause any change in the
information available to stockholders,” the Company is now telling Woods that the
reorganization had precisely that effect. Throughout this litigation, the Company has
maintained that because SMCO has the documents that Woods wants to obtain, the
Company cannot produce them. See Dkt. 7 at 19. And despite telling stockholders that the
reorganization would “have no impact on individual stockholders other than economic
benefits and tax savings,” the Company is now maintaining that the reorganization cut off
the stockholders’ ability to obtain books and records about the Company’s oversight of its
investments.
The Company is required to provide Woods with “access to all of the documents in
the corporation’s possession, custody or control, that are necessary to satisfy [the
plaintiff’s] proper purpose.” Saito, 806 A.2d at 114–15. The record establishes that the
humans who control the Company have control over the books and records necessary to
respond to Woods’ request. The same individuals sit on the board of directors for both the
Company and SMCO. JX 19 at ’461; JX 20 at ’462; JX 21 at ’477. The companies share
35
office space, and the companies’ officers and employees use the same “@saharaent.com”
domain name for their email addresses. JX 16 at ’286. The Company provides its
stockholders with consolidated financial information on behalf of both companies. Its
financial reports state, “Although technically two separate companies, Sahara Enterprises,
Inc. and SMCO, Inc. are audited and reported annually on a combined basis.” JX 9 at ’002.
The Company also has responded to requests for information from stockholders with
information about both companies in a single communication.9 Recognizing this reality,
the Company represented at trial that it would not “hide documents” based on “the labels
on the filing cabinets.” Tr. 123.
Directing the Company to produce documents that the humans who control it can
access whenever they wish in the ordinary course of business does not involve any type of
veil piercing, nor does it ignore the separate existence of these entities. It rather recognizes
that the books and records nominally held by SMCO or Sahara Investments are within the
Company’s “possession, custody or control.” A corporation is a juridical entity that only
can act through human representatives. See, e.g., Carden v. Arkoma Assocs., 494 U.S. 185,
201 (1990); State v. Colbert, 1987 WL 26917, at *2 (Del. Nov. 23, 1987); Clifton v. State,
9
E.g., JX 10 (“I have gathered some information regarding Avery’s basis in her
shares of Sahara Enterprises, Inc. and SMCO, Inc. The information is within two
documents: ‘Avery Stock Basis Info.xlsx’ and ‘SMCO Basis letter.pdf’.”); JX 11
(providing certificates of incorporation, bylaws, and stockholder records for the Company
and SMCO); JX 12 (providing records for the Company and SMCO); JX 13 (providing an
“estimate of the unaudited and undiscounted net asset value per share of [the Company]
and SMCO, Inc.”).
36
145 A.2d 392, 393 (Del. 1958). If the entity’s human representatives can access books and
records in the ordinary course of business whenever they wish to do so for their own
purposes, then they equally can be compelled to do so by court order. When responding to
the Demand, the Company shall also produce any documents nominally held by SMCO or
Sahara Investments that the human controllers of the Company (its directors and senior
officers) can access in the ordinary course of business.
III. CONCLUSION
Woods is granted an inspection of books and records as set forth in this decision.
The parties shall agree upon and submit a final order that has been approved as to form. If
there are other issues that the court needs to address to bring this matter to a conclusion at
the trial level, then the parties shall submit a joint letter within ten days that identifies those
issues and recommends a path for resolving them.
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