IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
KNOTT PARTNERS L.P., )
)
Plaintiff, )
)
v. ) C.A. No. 2021-0583-SG
)
TELEPATHY LABS, INC., )
)
Defendant. )
)
)
)
MEMORANDUM OPINION
Date Submitted: November 4, 2021
Date Decided: November 23, 2021
Neal C. Belgam, Jason Z. Miller, and Michael C. Wagner, of SMITH,
KATZENSTEIN & JENKINS LLP, Wilmington, Delaware; OF COUNSEL:
Christopher M. Caparelli, of TORYS LLP, New York, New York, Attorneys for
Plaintiff Knott Partners L.P.
Thomas G. Macauley, of MACAULEY LLC, Wilmington, Delaware; OF
COUNSEL: Euripides D. Dalmanieras, of FOLEY HOAG LLP, Boston,
Massachusetts, Attorneys for Defendant Telepathy Labs, Inc.
GLASSCOCK, Vice Chancellor
Generally, in considering a demand for books and records under Section 220
of the Delaware General Corporation Law by an individual purporting to be a
stockholder-of-record, 1 a corporation may rely on its stock ledger to determine
whether the demanding party is a stockholder and thus has standing under the statute.
This is a salutary rule, permitting the corporation an easy reference for determining
whether an individual purporting to be a stockholder-of-record is such. Section 220
is a statutory summary proceeding, and forcing litigants into the position of
submitting extrinsic evidence of stockholder status would be a goad to inefficiency
generally incompatible with such an action. In the unusual case before me, however,
the corporation was aware of the status of Knott Partners L.P., the Plaintiff, as a
stockholder, but failed to acknowledge that fact on its stock ledger. It seeks to rely
on that deficient stock ledger to achieve a dismissal, and to put the Plaintiff to the
expense of a new demand and complaint. In these narrow circumstances, I find that
the Plaintiff has fulfilled its statutory duty to establish it was a stockholder as of the
time of demand.
1
8 Del. C. § 220. As amended in 2003, the Section also permits beneficial holders to seek
corporate records in their own names. Id. § 220(a)(1); S.B. 127, 142nd Gen. Assemb., Reg. Sess.
(Del. 2003).
1
I. BACKGROUND
In order to successfully seek corporate records under Section 220, a plaintiff
must demonstrate that it is a stockholder. 2 This is a post-trial Memorandum Opinion
regarding that predicate standing issue only. The record created at trial and the pre-
trial briefing go in some instances beyond the facts necessary to a determination of
stockholder status. The facts presented below are limited to those necessary to
answer the question of the Plaintiff’s status as a stockholder as of the date of the
Section 220 demand (the “220 Demand”).
A. Factual Overview3
1. The Note Purchase Agreement and Facts Regarding Conversion
In the summer of 2019, the Plaintiff was considering the purchase of
convertible notes from Telepathy Labs, Inc. (the “Defendant”). 4 On August 30,
2019, to facilitate the sale, the then-chairman of the Defendant sent the Plaintiff an
email, providing a Note Purchase Agreement (the “NPA”) investment package.5
Attached to that same email was a “Series Seed-3 enrollment package,” which
included a form of Series Seed-3 Preferred Stock Investment Agreement (the
2
See 8 Del. C. § 220.
3
Where the facts are drawn from exhibits jointly submitted at trial, they are referred to according
to the numbers provided on the parties’ joint exhibit list and, where needed, with page numbers
derived from the stamp on each JX page (“JX __, at __”).
4
See JX 4 (note purchase agreement solicitation package); see also Pl.’s Verified Am. And Suppl.
Compl., Dkt. No. 11; Def.’s Opp’n Pl.’s Renewed Mot. for Expedited Proceedings, ¶ 19, Dkt. No.
15 [hereinafter “Amended Compl.”].
5
See JX 43.
2
“Investment Agreement”), to be applicable upon conversion of the notes. 6 The form
was undated except for the year, provided as “2017.” 7
Shortly thereafter, on September 5, 2019, the Plaintiff purchased $2 million
in convertible notes from the Defendant, under the NPA.8 Section 3.5(b) of the NPA
reads as follows:
Upon Maturity. In the event that any principal or interest
under any of the Notes remains outstanding on the
Maturity Date, all outstanding principal and interest on
any such Note shall automatically convert into that
number of shares of the Company’s Series Seed-3
Preferred Stock . . . . The Purchasers agree in connection
with the conversion of the Notes in accordance with this
Section 3.5(b) to execute a Series Seed-3 Preferred Stock
Investment Agreement in the form entered into by the
Company and the holders of Series Seed-3 Preferred
Stock.9
“Maturity Date” is defined in the NPA as “twenty-four (24) months following
the initial closing.”10 “Initial closing” is not defined.11 One other investor closed an
NPA with the Defendant on June 20, 2019, leading (assuming that closing was an
6
See id.
7
Id., at PX3.0012 (“‘Agreement Date’ means [___________], 2017.”).
8
JX 5.
9
Id., § 3.5(b).
10
See id., § 3.1. The definition specifies that the Maturity Date will occur on the earliest of three
separate events, but no party argued at trial that either of the two alternative events was controlling.
See id.
11
See generally JX 5.
3
“initial closing”) to a Maturity Date of June 20, 2021.12 Thus, the Plaintiff proceeded
as if June 20, 2021 were its Maturity Date, despite the lack of clarity in the NPA.13
In anticipation of its note conversion on June 20, 2021, the Plaintiff returned
to the Defendant, on June 18, 2021, the enrollment package the Defendant had
provided previously (the “June 18 Delivery”), executed by the Plaintiff. 14 This
delivery included a signed but undated copy of the Investment Agreement as
received in August 2019.15 The Plaintiff avers that it believed that the NPA made
the conversion of its notes into stock “automatic,” as specifically provided in the
NPA. 16
On June 23, 2021, the Defendant acknowledged the June 18 Delivery (the
“June 23 Letter”), but instead of confirming that the conversion had occurred on
June 20, the Defendant offered the Plaintiff the opportunity to convert its notes into
Series A (rather than Series Seed-3) shares.17 The June 23 Letter identified June 28,
2021, as the deadline for the Plaintiff to confirm whether or not it wanted its notes
12
See JX 3, at KP-TL000603 (side letter with investor referencing an NPA between the parties
“dated on or about the date hereof,” June 20, 2019).
13
JX 57, ¶ 39. The Plaintiff, for reasons unclear to me, at trial attempted to establish its standing
as a stockholder as of the earlier initial closing date of March 29, 2021. See, e.g., Pl.’s (Am.)
Opening Trial Br. Section 220 Claim 8, Dkt. No. 67. I need not reach this issue, for I find that the
Plaintiff was a stockholder as of the date of its demand on June 28, 2021.
14
See JX 43.
15
Id., at PX3.0030.
16
See id., at PX3.0001 (“Since our notes automatically convert on (or before) June 20th, we have
gone ahead and filled out the enrollment packaged provided to us . . . upon the closing of our
investment in 2019.”).
17
JX 44, at PX7.0001.
4
converted into Series Seed-3 shares.18 The June 23 Letter also stated that if the
Plaintiff did not answer the letter in writing by June 28, the Defendant would
“interpret [the Plaintiff’s] silence as confirmation that Knott Partners wants its note
converted into Series Seed-3 shares. The Company calculates that as of June 28,
2021 . . . . The [Plaintiff’s] investment amount would be converted into 513,199
Series Seed-3 shares.” 19
2. The 220 Demand and Facts Thereafter
The Plaintiff served its 220 Demand on the Defendant on June 28, 2021.20
That same communication also confirmed in writing that the Plaintiff considered
itself a stockholder of Series Seed-3 Preferred Stock as of June 20, 2021, and was
no longer in a position to determine whether to convert into Series A Preferred
Stock.21
Prior to receiving the Defendant’s response, the Plaintiff filed its original
complaint in this matter on July 8, 2021. 22
The Defendant answered the 220 Demand on July 15, 2021, stating that “[i]n
order to complete the conversion” of the Plaintiff’s notes into stock “in accordance
18
Id. ([W]e request that you confirm, in writing, by not later than 5 p.m. on Monday, June 28,
2021, whether Knott Partners does, in fact, want its note converted into Series Seed-3
shares . . . .”).
19
Id.
20
See JX 45.
21
See id., at PX33.0001.
22
Pl. Knott Partners L.P. Books and Rs. Verified Compl. Against Def. Telepathy Labs, Inc., Dkt.
No. 1 [hereinafter “Compl.”]; see also JX 47.
5
with paragraph 3.5(b)” of the NPA, the Plaintiff would need to sign a joinder
agreement to the Investment Agreement (provided as part of that same email).23 The
proffered joinder agreement does not appear to have been attached to the original
Series Seed-3 enrollment package, is not discussed in the body of that email, and is
not referenced in the text of the Investment Agreement itself as a requirement for the
vesting of stock.24
The Plaintiff refused to sign the joinder agreement on July 16, 2021,
considering it unnecessary given the Plaintiff’s view that conversion had already
occurred. 25 Additional correspondence traded between counsels clarified the
Defendant’s position that the Plaintiff lacked standing under Section 220 to make
the 220 Demand on June 28, 2021.26
On August 5, 2021, the Defendant’s sole director executed a written consent
of sole director (the “August 5 Consent”). 27 Attached to that consent as an exhibit
was a proposed amendment to the NPA to be distributed to “Acting Noteholders.”28
That amendment, though in draft form, stated that the Plaintiff’s note “was converted
23
JX 51, at PX35.0001.
24
See generally JX 43; see also id., at PX3.0011–PX3.0030.
25
See, e.g., JX 53, at PX36.0002 (questioning why the Plaintiff would join an agreement to which
it was already a party).
26
See, e.g., JX 54, at PX37.0002.
27
JX 56.
28
Id., at KP-TL000940.
6
into 513,199 shares of Series Seed-3 Preferred Stock of the Company effective as of
[June 28, 2021].”29
B. Procedural History
As above, the original complaint in this matter was filed along with a motion
to expedite on July 8, 2021.30 An amended and supplemented complaint was filed
on August 10, 2021, and the Defendant opposed the Plaintiff’s motion for expedited
proceedings on August 16, 2021.31 The operative complaint seeks both Section 220
inspection rights as well as contractual inspection rights. 32 As such, the motion to
expedite was granted with respect to the Section 220 rights only on August 26, 2021;
discovery and motion practice followed.33 Trial regarding the Section 220 rights
was held on November 4, 2021.34
II. ANALYSIS
Achieving standing under Section 220 requires that a plaintiff “first establish
that: (1) [s]uch stockholder is a stockholder; (2) [s]uch stockholder has complied
with [Section 220] respecting the form and manner of making demand for inspection
29
Id. (emphasis added). For the avoidance of doubt, the bracketed date of “June 28, 2021” is
bracketed in the original. Id.
30
Compl.
31
Amended Compl.
32
See generally id.
33
Tr. 8-26-2021 Telephonic Hr’g and Ruling of the Court regarding Pl.’s Mot. Expedited
Proceedings, Dkt. No. 31.
34
Tr. 11-14-2021 of Section 220 Trial, Dkt. No. 76 [hereinafter “Trial Tr.”].
7
of such documents; and (3) [t]he inspection such stockholder seeks is for a proper
purpose.” 35
This Memorandum Opinion deals solely with the threshold question of
whether the Plaintiff was a stockholder as of the 220 Demand, that is, June 28, 2021.
A. Stockholder as Holder of Record under Section 220
Section 220 defines stockholder as “a holder of record of stock in a stock
corporation, or a person who is the beneficial owner of shares of such stock held
either in a voting trust or by a nominee on behalf of such person.” 36 The Plaintiff
here contends that it is an owner of record.37
A brief contextualization of Section 220 is helpful in assessing the instant
question. A stockholder’s right to inspect the books and records of a corporation
was a common law right under Delaware law prior to the enactment of Section 220.38
As the statute is in derogation of common law, it must be strictly construed.39 I also
remain mindful of the need to retain “consistency and established reliability” in the
interpretation of Section 220.40
35
8 Del. C. § 220(c).
36
Id. § 220(a)(1).
37
Trial Tr., 43:8–10.
38
Rainbow Nav., Inc. v. Pan Ocean Nav., Inc., 535 A.2d 1357, 1359 (Del. 1987).
39
See id. at 1359 (“The right to examine the corporation’s stock ledger is hollow, indeed, if it can
be defeated by never maintaining [the stock ledger.] If the common law right of a stockholder to
examine a corporation’s books can only be diminished by legislation . . . the statutorily guaranteed
right . . . cannot be frustrated by nonfeasance.”).
40
Shaw v. Agri-Mark, Inc., 663 A.2d 464, 470 (Del. 1995).
8
Caselaw determining who is a stockholder or a holder of record under Section
220 generally relies on the corporation’s existing stock ledger, as “Delaware courts
require strict adherence to the [S]ection 220 inspection demand procedural
requirements.”41 “[A] stockholder’s right to inspection is status-related.”42 As such,
“a corporation may rely on its stock ledger in determining which stockholders are
eligible to vote or exercise the important rights of a stockholder,” including the right
to inspection under Section 220. 43
Against that background, Section 220(c) states that “[t]he Court of Chancery
is hereby vested with exclusive jurisdiction to determine whether or not the person
seeking inspection is entitled to the inspection sought.” 44 “[T]he Court of Chancery,
in making its determination of a person’s status as a stockholder of record, ‘is
empowered to examine all pertinent evidence with the view of reaching a
determination of where justice lies.’”45 Prudently, the Court seldom uses this
41
See Jacob v. Bloom Energy Corp., 2021 WL 733438, at *4 (Del. Ch. Feb. 25, 2021) (quoting
Cent. Laborers Pension Fund v. News Corp., 45 A.3d 139, 145 (Del. 2012)).
42
Shaw, 663 A.2d at 467 (citing State ex rel. Richardson v. Swift, 30 A. 781, 783 (Del. Super.
1885)).
43
Id. at 469 (citing Ala. By-Products v. Cede & Co., 657 A.2d 254, 262–63 (Del. 1995); then citing
Preston v. Allison, 650 A.2d 646, 649 (Del. 1994); then citing In re ENSTAR, 604 A.2d 404, 412
(Del. 1992); then citing Enstar Corp. v. Senouf, 535 A.2d 1351 (Del. 1987); then citing Rainbow,
535 A.2d at 1359–60; then citing Am. Hardware Corp. v. Savage Arms Corp., 136 A.2d 690 (Del.
1957); then citing Salt Dome Oil Corp. v. Schenck, 41 A.2d 583, 589 (Del. 1945)).
44
8 Del. C. § 220(c).
45
Rainbow, 535 A.2d at 1359 (quoting In re Canal Constr. Co., 182 A. 545, 548 (Del. Ch. 1936)).
9
authority, occasionally acknowledging its existence but typically declining to
inquire beyond the ledger itself.46
One exception to the stock ledger standard has been recognized to date: a court
may look outside the stock ledger to extrinsic evidence “where the stock ledger is
either blank or nonexistent.”47 The Delaware Supreme Court has previously found
it “implicit in Sections 219 and 220 that Delaware corporations have an affirmative
duty to maintain a stock ledger.”48 Only if a corporation fails in that duty may a
court “look to extrinsic evidence in deciding whether a party possesses record
stockholder status.” 49
Prudence demonstrates that any expansion of the interpretation of “holder of
record” must be undertaken with solemnity. However, in the circumstances before
46
See, e.g., W. Air Lines, Inc. v. Kerkorian, 254 A.2d 240, 242 (Del. 1969).
47
Shaw, 663 A.2d at 470 (citing Rainbow, 535 A.2d at 1361). Rainbow examined the language of
the then-current Section 219(c), which stated that “[t]he stock ledger shall be the only evidence as
to who are the stockholders entitled to examine . . . the books of the corporation.” See Rainbow,
535 A.2d at 1359 (emphasis added) (citing 8 Del. C. § 219(c)). This italicized language was
removed in 2003, and Section 220(a), defining the term “stockholder,” was simultaneously
expanded to include beneficial owners in addition to holders of record. See S.B. 127, 142nd Gen.
Assemb., Reg. Sess. (Del. 2003). While Rainbow purported to limit its holding “only” to situations
where the corporation in question did not have a stock ledger or had an entirely blank stock ledger,
it does not preclude the result here, as the language it examines has since been amended, and the
legislature has expanded the universe of appropriate considerations in determining who constitutes
a stockholder of record. See Pogue v. Hybrid Energy, Inc., 2016 WL 4154253, at *4 (Del. Ch.
Aug. 5, 2016).
48
Rainbow, 663 A.2d at 1359 (citing Bryan v. W. Pac. R.R. Corp., 35 A.2d 909, 914 (Del. Ch.
1944)).
49
Shaw, 663 A.2d at 470 (citing Rainbow, 535 A.2d at 1361).
10
me, I find that an examination beyond the ledger, given the specific facts of this case,
is necessary to serve the interests of equity.
The Defendant has acknowledged in writing that the Plaintiff’s notes
converted no later than June 28, 2021—both in its counsel’s June 23 Letter and in
its August 5 Consent. I find as a matter of fact that these statements, made both to
the Plaintiff and to an external audience of “Acting Noteholders,” are concessions
on behalf of the Defendant that the Plaintiff was, in fact, a stockholder as of June 28,
2021. The Defendant takes the position, however, that because it failed to update its
stock ledger accordingly50—presumably because it insisted on the Plaintiff
executing a joinder agreement that was not identified as necessary under the NPA,
the Investment Agreement, or the enrollment package—it need not treat the Plaintiff
as a stockholder for Section 220 purposes. 51 It acknowledges that the Plaintiff is
now listed on the stock ledger, and argues that this 220 action should be dismissed,
and a new mirror-image 220 demand then be refiled by the Plaintiff, if desired.52
The Defendant’s late-in-the-game attempt to require the Plaintiff to execute a
joinder before recognizing the conversion of notes to shares does not excuse its
failure to update its records 53 to denominate the Plaintiff as a record holder of its
50
See, e.g., Trial Tr. at 54:16–22; see id. at 58:14–17 (“We don’t dispute that [Knott Partners are]
stockholders. We dispute that they were stockholders of record as of June 28.”)
51
See id. at 55.
52
Id. at 50.
53
See 8 Del. C. § 219(c) (“stock ledger” is “1 or more records . . . of the corporation in which the
names of all the corporation’s stockholders of record . . . are recorded . . . .”)
11
stock. First, this purported condition would read the term “automatically” out of the
plain language of Section 3.5(b) of the NPA, which indicates that the notes will
automatically convert at the Maturity Date—i.e., conversion will occur without
other action.54 The Defendant’s interpretation renders the word “automatically” a
nullity. Further, in the event the provision of an Investment Agreement was
necessary to the conversion—and I do not find that it was—the Plaintiff returned the
executed form copy of the Investment Agreement in a timely fashion predating June
20 (and June 28). The terms of the Investment Agreement itself do not contemplate
that a joinder is necessary to be added as a new investor, and the NPA only requires
the Plaintiff to “execute” the Investment Agreement—not a joinder thereto. 55 Again,
the Defendant itself concedes that the Plaintiff was in fact a stockholder as of the
demand date.56 In concert with the Defendant’s concession, I do not find that the
joinder acts as a precondition to conversion. I find by clear and convincing evidence
that the Plaintiff was a stockholder at the time of the demand, and that the Defendant
knew the stockholder was a stockholder as of that date.
There is great value in allowing corporations to rely on the stock ledger in
responding to purported demands by record stockholders under Section 220. Any
wholesale departure from this rule would involve great potential for mischief and
54
JX 5, § 3.5(b).
55
See generally JX 5.
56
See JX 44; JX 56.
12
inefficiency. It would, moreover, be incompatible with the required strict reading of
the statute. These considerations cannot amount to a license for corporations to
manipulate their stock ledgers to frustrate inspection rights, however. Where the
ledger is non-existent, or blank, therefore, extrinsic evidence may be sufficient to
demonstrate a stockholder was a stockholder at the time of demand. 57 Similarly, I
find, where a corporation has failed to update its stock ledger to reflect a new
stockholder on a date certain, but is otherwise aware of the bona fides of the
stockholder’s status as of that date, and concedes in documentation circulated
outside the corporation that the same entity was in fact a stockholder as of that date,
that corporation cannot rely on the deficient stock ledger to deprive the stockholder
of its inspection rights under Section 220.
Here, I find that the Defendant corporation was aware of the Plaintiff’s status
as a stockholder on the demand date, and I find that the Plaintiff was a stockholder
for purposes of Section 220 as of June 28, 2021, the date of the 220 Demand.
III. CONCLUSION
The Plaintiff’s standing as a stockholder as of the date of the 220 Demand is
confirmed. Having decided the predicate issue of stockholder status, the parties are
directed to meet and confer and inform me of what, if any, issues remain.
57
Shaw, 663 A.2d at 470 (citing Rainbow, 535 A.2d at 1361).
13