IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
MARK LAVIN, :
:
Plaintiff, :
:
v. : C.A. No. 2017-0547-JRS
:
WEST CORPORATION, :
:
Defendant. :
OPINION
Date Submitted: October 9, 2017
Date Decided: December 29, 2017
Peter B. Andrews, Esquire, Craig J. Springer, Esquire and David M. Sborz, Esquire
of Andrews & Springer LLC, Wilmington, Delaware; Randall J. Baron, Esquire and
David T. Wissbroecker, Esquire of Robbins Geller Rudman & Dowd LLP, San
Diego, California; Christopher H. Lyons, Esquire of Robbins Geller Rudman &
Dowd LLP, Nashville, Tennessee; and W. Scott Holleman, Esquire of Johnson
Fistel, LLP, New York, New York, Attorneys for Plaintiff.
Kevin R. Shannon, Esquire, Christopher N. Kelly, Esquire and Daniel M. Rusk,
Esquire of Potter Anderson & Corroon LLP, Wilmington, Delaware and Walter C.
Carlson, Esquire, Nilofer I. Umar, Esquire, and Elizabeth Y. Austin, Esquire of
Sidley Austin LLP, Chicago, Illinois, Attorneys for Defendant.
SLIGHTS, Vice Chancellor
In early 2016, West Corporation (“West” or the “Company”) began to
consider strategic alternatives, including a possible sale of the Company or its
business segments. The Company initiated a formal sales process later that year and
continued with that process through the spring of 2017. Ultimately, West entered
into an Agreement and Plan of Merger (the “Merger Agreement”) with affiliates of
Apollo Global Management on May 9, 2017, wherein Apollo agreed to purchase
West’s outstanding stock at $23.50 per share in cash (the “Merger”). On June 27,
2017, the Company distributed its Schedule 14A Proxy Statement (the “Proxy”) to
its stockholders in which it solicited their votes in favor of the Merger. One month
later, the overwhelming majority of West’s stockholders voted to approve the
Merger and it was consummated shortly thereafter.
On July 19, 2017, Plaintiff, Mark Lavin, served a demand upon West to
inspect its books and records under Section 220 of the Delaware General
Corporation Law (“DGCL”).1 In his demand, Lavin stated that his purpose was to
“determine whether wrongdoing and mismanagement had taken place” in
connection with the Merger and “to investigate the independence and
disinterestedness” of the Company’s directors.2 Soon after, West rejected Lavin’s
1
8 Del. C. § 220.
2
JX 3 (Lavin’s Demand to Inspect Books and Records) at 7.
1
demand for failure to state a proper purpose for inspection and because the demand
was overly broad.
Lavin filed his Verified Complaint to Compel Inspection on July 27, 2017 (the
day after the stockholders voted to approve the Merger). In its answer to the
Complaint, West reiterated its position that inspection was not justified because
Lavin could not, as a matter of law, articulate a credible basis of wrongdoing against
West’s board of directors (the “Board”). In this regard, West maintained that not
only did the Board behave reasonably in recommending the Merger as a matter of
law, West’s disinterested stockholders approved that recommendation in a fully
informed, uncoerced vote. According to West, under the so-called Corwin doctrine,3
the stockholder vote “cleansed” any purported breaches of fiduciary duty and,
therefore, Lavin may challenge the Merger only on grounds of waste (which he has
not stated as a basis for inspection).4
The parties agreed that the trial of this matter would be limited to a “paper
record” without deposition or live testimony. After carefully reviewing the evidence
and the arguments of counsel, I conclude in this post-trial opinion that Lavin has
demonstrated, by a preponderance of the evidence, a credible basis from which the
3
Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304 (Del. 2015).
4
JX 4 (West’s Response to Lavin’s Demand) at 3.
2
Court can infer that wrongdoing related to the Merger may have occurred. In so
finding, I reject, as a matter of law, West’s argument that Corwin will stand as an
impediment to an otherwise properly supported demand for inspection under
Section 220. Any contrary finding would invite defendants improperly to draw the
court into adjudicating merits defenses to potential underlying claims in order to
defeat otherwise properly supported Section 220 demands. Equally compelling, the
Court should not (and will not here) prematurely adjudicate a Corwin defense when
to do so might deprive a putative stockholder plaintiff of the ability to use
Section 220 as a means to enhance the quality of his pleading in a circumstance
where precise pleading, under our law, is at a premium.
Judgment is entered for Lavin. West shall produce for inspection the books
and records designated herein as essential to Lavin’s pursuit of his proper purpose.
I. FACTUAL BACKGROUND
The Court held trial on a paper record on October 9, 2017. I have drawn the
facts from the trial exhibits and those matters of which the Court may take judicial
notice. Unless noted otherwise, the following facts were proven by a preponderance
of the evidence.
3
A. The Parties
Plaintiff, Mark Lavin, is a West shareholder who has continuously owned his
West common stock since at least June 1, 2017.5 Defendant, West, is a Delaware
corporation with its principal place of business in Omaha, Nebraska.
B. West’s Business
West is a global provider of communication and network infrastructure
services. It provides voice and data services through four “reporting segments”:
Unified Communications Services (“UC”), Safety Services, Interactive Services and
Specialized Agent Services.6 UC has two separate “operating segments”:
(1) Unified Communications (“UCaaS”) and Telecom; and (2) Conferencing.7
UC is West’s largest reporting segment, accounting for approximately 62% of
the Company’s total revenue and 61% of its total operating income.8 Of UC’s two
operating segments, Conferencing is by far the largest, accounting for approximately
5
Lavin attached to his Verified Complaint a Charles Schwab statement showing his
holdings as of June 1, 2017, which included 3,320 shares of West common stock. JX 3
(Lavin’s Demand to Inspect Books and Records). West does not dispute that Lavin is and
has been a stockholder at all relevant times.
6
JX 5 (West Sched. 14A Definitive Proxy Statement filed June 27, 2017 (the “Proxy”))
at 19.
7
See JX 16 (West Form 8-K filed on Feb. 19, 2016) at 15, 18; JX 6 (Wells Fargo Equity
Research on West Corporation dated Feb. 28, 2017 (“Wells Fargo Report”)).
8
JX 5 (Proxy) at 19; JX 6 (Wells Fargo Report); JX 16 (West Form 8-K) at 15, 18.
4
50% of West’s overall revenue.9 The Conferencing segment, not surprisingly,
concentrates on facilitating audio, webcast and other conferencing capabilities in
virtual environments, while the UCaaS segment provides direct IP connectivity and
internet platforms.10
West’s remaining reporting segments, discussed below, range between
approximately 10% and 12% of West’s annual revenue.11 The Safety Services
segment includes, inter alia, “next generation 9-1-1,” which routes a 9-1-1 caller’s
physical location to specific public-safety answering points.12 The Interactive
Services segment includes outbound notification systems (voice, text/SMS and
chat), inbound speech solutions, cloud contract center technologies, and web, mobile
and professional services.13 Lastly, the Specialized Agent Services segment includes
healthcare advocacy services, cost management services and revenue generation
services.14
9
JX 6 (Wells Fargo Report). It appears from the Proxy that the UC Segment, and
Conferencing in particular, was not doing as well as expected towards the end of 2016,
which was about the time that West announced it was pursuing strategic alternatives. JX 5
(Proxy) at 30.
10
JX 16 (West Form 8-K) at 19.
11
JX 16 (West Form 8-K) at 5, 28, 34, 40.
12
JX 16 (West Form 8-K) at 32.
13
JX 16 (West Form 8-K) at 33–38.
14
JX 16 (West Form 8-K) at 39–46.
5
C. West’s Major Shareholders and Board Composition
Mary West and Gary West (the “Founders”) established West in 1986. The
Company was publicly traded from 1996 until 2006, when it completed a leveraged
recapitalization sponsored by two private equity funds, Thomas H. Lee Partners, L.P.
(“TH Lee”) and Quadrangle Group LLC (“Quadrangle”).15 Thereafter, in October
2006, TH Lee and Quadrangle purchased the Company’s publicly traded securities
for cash in a going-private transaction.16 As of 2013, TH Lee and Quadrangle
collectively owned approximately 70% of West’s common stock. The Company
went public for a second time in March 2013.17 As a result of this public offering,
TH Lee’s holdings were diluted to 43.5% and Quadrangle’s holdings were diluted
to 9.1%.18
At the same time TH Lee and Quadrangle took the Company public in 2013,
they entered into a stockholder agreement with the Founders and the Company,
whereby the parties agreed that if Quadrangle maintained at least 25% of the shares
it held as of the March 2013 IPO date, then it would retain the right to elect one
JX 17 (West’s Form 10-K Annual Report filed on Feb. 16, 2017) at 3. In this Opinion,
15
TH Lee and Quadrangle are used to refer both to those specific entities and those entities
when acting in combination with their affiliates.
16
JX 17 (West’s Form 10-K Annual Report filed Feb. 16, 2017) at 3.
17
JX 17 (West’s Form 10-K Annual Report filed Feb. 16, 2017) at 4.
18
JX 9 (West’s Prospectus filed on Mar. 22, 2013) at 108.
6
director.19 For its part, TH Lee bargained for a right to elect up to four directors so
long as it held more than 50% of the shares held as of the IPO date.20 Together,
TH Lee and Quadrangle reserved the right to elect half of West’s ten-member
board.21
Leading up to the Merger, the Board was comprised of Lee Adrean,
Thomas B. Barker (West’s Chairman and CEO), Donald M. Casey, Jr., Anthony J.
DiNovi, Paul R. Garcia, Laura A. Grattan, Jeanette A. Horan, Michael A. Huber,
Diane E. Offereins and Gregory T. Sloma.22 Quadrangle designated Huber, its
president and managing principal. TH Lee designated DiNovi and Grattan, its co-
president and managing director, respectively. West has represented in its SEC
filings that Sloma and Garcia are independent directors, but they were designated to
19
JX 7 (Amended and Restated S’holder Agreement (“S’holder Agreement”)) at 2 (“For so
long as the Quadrangle Investors own at least twenty-five percent (25%) of the Shares
listed as being owned by the Quadrangle Investors on Schedule I, the Quadrangle Investors
will be entitled to designate one (1) director.”).
20
JX 7 (S’holder Agreement) at 3 (“For so long as the THL Investors own at least five
percent (5%) of the Shares listed as being owned by the THL Investors on Schedule I, the
THL Investors will be entitled to designate a number of directors as determined under
Section 2.1.3.”); id. § 2.1.3 (“The initial number of THL Directors is four (4), but the
number of directors that THL Investors are entitled to designate will automatically be
reduced effective at and after such time as the THL Investors cease to hold Shares
constituting the requisite percentage of the Shares listed as being owned by the
THL Investors [on the following schedule] . . . [If THL maintains more than 50% of its
holdings, it may designate 4 directors].”).
21
JX 7 (S’holder Agreement) at 2–3.
22
JX 5 (Proxy) at 58–59; JX 8 (Annual Meeting Proxy) at 6–9.
7
the Board just before the 2013 IPO when TH Lee and Quadrangle controlled the
Company.23
According to West, Nasdaq Marketplace Rule 5605(b)(1) required the Board
to be comprised of a majority of independent directors in order for West to remain a
“non-controlled company,” which ostensibly was its status at the time of the
Merger.24 Although West claims that the majority of the Board was independent,25
it concedes that TH Lee and Quadrangle could still exercise their contractual rights
under the Stockholder Agreement to appoint five of the Company’s ten directors
throughout the sales process and at the time of the Merger.26
As TH Lee’s and Quadrangle’s investment in West approached its eight-year
mark, they began to liquidate their holdings. Starting in February 2014, the funds
initiated a plan to reduce their holdings that eventually included two secondary
offerings, one in March 2015 and the other in June 2015.27 After each offering,
23
JX 9 (West’s Prospectus filed on Mar. 22, 2013) at 10, 80.
24
See, e.g., JX 10 (West’s March 2015 Secondary Offering Prospectus Supplement) at
S-14; JX 24 (West’s Form 8-K filed on Dec. 14, 2015).
25
See Def. West’s Reply Br. 11–12 (“West’s Board determined that six of its ten Board
members (i.e., all of the directors except for West’s CEO, the two THL designees, and the
one Quadrangle designee) were independent.”).
26
Tr. at 81:1–6 (“[W]e don’t dispute this. I mean, this provides that TH Lee has the right
to appoint up to four individuals on West’s board of directors.”).
27
JX 10 (March 2015 Secondary Offering Prospectus); JX 11 (June 2015 Secondary
Offering Prospectus).
8
West’s stock price dropped substantially.28 Despite selling a large percentage of
their holdings, TH Lee and Quadrangle still held enough stock to maintain their full
rights to appoint directors under the Shareholder Agreement.29
D. West Considers Strategic Alternatives, Evaluates Bidders and Selects
Apollo
In September 2015, West and TH Lee began to receive unsolicited
expressions of interest from third parties regarding possible acquisitions of one or
more of the Company’s business segments.30 The following year, in November
2016, the Board announced that it was considering strategic transactions. According
to the Proxy, from September 2015 through December 2016, at least thirteen third
parties approached West or TH Lee expressing an interest in acquiring either one or
more business segments or the whole Company.31 Indeed, during this time, West
received an indication of interest for each segment of the Company.32
28
JX 12 (Yahoo! Finance Chart of West Stock Price from March 25, 2013 to September 5,
2017 (“Yahoo! Finance Chart”)).
29
JX 5 (Proxy) at 107; JX 7 (S’holder Agreement) at 2–3. As of the date of the Merger,
TH Lee owned approximately 21.3% of the Company’s shares (18,176,133 shares), and
Quadrangle owned approximately 4.4% of its outstanding shares (3,781,961 shares). See
also JX 8 (Annual Meeting Proxy) at 5.
30
JX 5 (Proxy) at 28–32.
31
JX 5 (Proxy) at 28–32.
32
E.g., JX 5 (Proxy) at 32 (“With respect to the Preliminary Indications of Interest
contemplating a Potential Segment Acquisition, Party A’s Preliminary Indication of
Interest contemplated an acquisition of the Safety Services segment . . . . Party G’s
9
West selected Centerview as its financial advisor in April 2016. Centerview’s
engagement provided for a contingency fee arrangement whereby it would receive
a modest flat fee for its work but could earn up to $28 million if the Company
consummated the Merger.33 The Proxy indicates that Centerview contacted fifty-
five potential bidders and that West executed confidentiality agreements with thirty
different parties.34
By January 2017, the Board instructed Centerview and management to
“focus” on a sale of the Company as a whole.35 After the Board decided to prioritize
a whole-company sale, two bidders, “Party H” and “Party L,” made an offer to
purchase certain business segments for substantial consideration. Specifically,
Party H offered between $2.4 billion and $2.6 billion for all segments excluding the
Preliminary Indication of Interest contemplated an acquisition of the Interactive Services
segment . . . . Party J’s Preliminary Indication of Interest contemplated an acquisition of
the Specialized Agent Services segment . . . . Party K’s Preliminary Indication of Interest
contemplated an acquisition of the Unified Communications Services segment for
$2.3 billion.”) (emphasis supplied). The Proxy indicates that the Company received
several more indications of interest and bids not specifically described therein. JX 5
(Proxy) at 32–35.
33
JX 5 (Proxy) at 56 (“In connection with Centerview’s services as the financial advisor
to the Board, the Company has agreed to pay Centerview an estimated aggregate fee of
$28 million, $2 million of which was payable upon the rendering of Centerview’s opinion
and the remainder of which is payable contingent upon consummation of the
Transaction.”).
34
JX 5 (Proxy) at 35.
35
JX 5 (Proxy) at 33.
10
UC segment.36 Party L made an offer to purchase the Interactive Services and Safety
Services segments, along with assets from the Specialized Agent Services segment,
for $2.36 billion.37
According to the Proxy, West granted only Apollo, Party H, Party L and one
other party access to its data room.38 Thereafter, the Board began negotiating
exclusively with Apollo.39 On May 9, 2017, West and Apollo signed the Merger
Agreement, wherein Apollo agreed to acquire the Company for $23.50 per share,
which equates to approximately $2 billion in cash or $5.2 billion in enterprise value
taking into account West’s long-term debt of approximately $3.2 billion.40
The Merger Agreement contained a no-shop provision with a fiduciary out
that at least arguably made it more difficult for a sale of the Company’s segments to
36
JX 5 (Proxy) at 35.
37
JX 5 (Proxy) at 35.
38
It appears from the Proxy that Apollo, Party H and Party F (together with “Party I”) were
provided access to the data room on January 21, 2017, and Party L was provided access on
March 2, 2017. JX 5 (Proxy) at 33–34.
39
JX 5 (Proxy) at 36–39.
40
JX 5 (Proxy) at 28, 41; JX 17 (West’s Form 10-K Annual Report filed Feb. 16, 2017)
at 29. TH Lee, Quadrangle and the Founders entered into voting agreements with Apollo,
obligating them to “vote their shares of West common stock in favor of the proposal to
adopt the merger agreement. As of the close of business on the record date, these
stockholders and their affiliates beneficially owned, in the aggregate, approximately 46%
of our common stock.” JX 5 (Proxy) at 4, 110.
11
occur.41 According to the Merger Agreement, the Board could terminate the deal
with Apollo in favor of another transaction only if it received a “Superior Proposal,”
which was defined as a proposal to acquire at least 70% of West’s assets, revenue or
shares.42 Because West’s largest segment, the UC segment, accounted for
approximately 62% of West’s revenue, the no-shop could have shut out an offer for
one or more segments even if the offer was substantially greater than Apollo’s.
West filed the Proxy soliciting votes in favor of the Merger on June 27, 2017.43
Within a few days, five putative class action complaints were filed in the
U.S. District Court for the District of Nebraska, primarily alleging federal securities
law violations and claiming that the Proxy contained material omissions. 44 West
responded by filing a supplement to the Proxy thereby mooting the disclosure claims
41
JX 5 (Proxy) at 8, 85–87.
42
JX 5 (Proxy) at 8, 85–87.
43
JX 5 (Proxy).
44
Scarantino v. West Corp., No. 4:17-cv-03080 (D. Neb.); Wyant v. West Corp., 4:17-cv-
03081 (D. Neb.); Wilson v. West Corp., Case No. 8:17-cv-00228 (D. Neb.); Bushansky v.
West Corp., Case No. 4:17-cv-03083 (D. Neb.); Katz v. West Corp., Case No. 4:17-cv-
03084 (D. Neb.) (the “Nebraska Actions”).
12
in advance of the stockholder vote.45 On July 26, 2017, approximately 86% of the
outstanding shares voted and, of those, 99.8% voted in favor of the Merger.46
In connection with the transaction, Barker (the Chairman and CEO) was set
to receive a $19-million “golden parachute” comprised of a $7.5 million cash award
and $11.5 million for accelerated vesting of restricted stock, in addition to another
$9 million in cash for vested stock options and notional shares.47 West’s non-
employee directors were set to receive a $100,000 cash award in addition to
accelerated vesting of restricted stock units worth approximately $100,000.48 West’s
other high-level officers also were to receive “golden parachutes.”49
E. Lavin Makes a Section 220 Demand
On July 19, 2017, Lavin sent his demand to inspect West’s books and records
under Section 220 of the DGCL. His stated purpose was to “determine whether
45
JX 25 (West Form 8-K filed on July 19, 2017). It is not clear from the record whether
the Nebraska Actions are pending or, if resolved, how they were resolved.
46
JX 13 (West Form 8-K filed July 27, 2017) at 2. The Merger closed on October 10,
2017. West has not challenged Lavin’s standing to pursue his Section 220 claim.
47
JX 5 (Proxy) at 63 (showing Golden Parachute Payment of $19,187,530); id. at 59
(showing Executive Officer Vested Equity Awards).
JX 5 (Proxy) at 58. DiNovi, Grattan and Huber, TH Lee’s and Quadrangle’s designees,
48
were excluded from these awards. Id.
49
JX 5 (Proxy) at 63 (listing “Golden Parachute Payments” to four officers other than
Barker). I note that final argument in this case was presented the day before the Merger
closed so the record does not reflect whether any of the golden parachute payments were
actually made as scheduled.
13
wrongdoing and mismanagement had taken place” in connection with the Merger
and “to investigate the independence and disinterestedness” of the Company’s
directors.50 Lavin listed thirteen categories of books and records for inspection.
West rejected the demand on July 26, 2017, on the grounds that Lavin had not
articulated a credible basis for suspecting wrongdoing and had made an overbroad
inspection demand in any event.51
F. Procedural History
On July 27, 2017, Lavin filed a Verified Complaint to Compel Inspection of
Books and Records under Section 220. The parties stipulated to a trial on a paper
record,52 and the Court conducted that trial on October 9, 2017. This is the Court’s
post-trial decision.
II. ANALYSIS
Lavin argues that he has presented sufficient evidence from which the Court
can infer that West’s directors, for self-interested reasons, favored a less valuable
sale of the Company over a more valuable sale of its parts. Specifically, he contends
that the evidence supports an inference that (1) the Board knew that the most value-
maximizing option was a sale of the Company’s business segments; (2) a more
50
JX 3 (Lavin’s Demand to Inspect Books and Records) at 7.
51
JX 4 (West’s Response to Lavin’s Demand) at 2–5.
52
Stipulation and Scheduling Order (Aug. 17, 2017).
14
valuable sale of the segments was possible given that multiple bidders made
substantial offers for each of West’s segments; and (3) unlike a sale of the Company,
a sale of segments would not provide personal benefits for the directors and senior
management, nor would it provide TH Lee and Quadrangle with much needed
liquidity.53 Lavin also argues that Centerview suffered from conflicts of interest that
caused it improperly to favor the deal with Apollo. This, he contends, provides at
least a credible basis to infer that West’s directors and officers may have favored an
inadequate bidder, and thus may have breached their Revlon duties, possibly in bad
faith.54
Lavin also argues that the Board failed to disclose material information in the
Proxy. Specifically, he alleges that the Proxy omits financial growth profiles of
West’s operating segments, sum-of-the-parts analyses that Centerview may have
performed, relevant relationships that certain directors have with TH Lee and
Quadrangle and the “seriousness” of the partial-company/segment bidders. Lavin
53
As is common, the “liquidity” argument reduces to a contention that the private equity
funds were nearing their investment horizons and pursued a quick liquidity event that
would take out their entire investment in West rather than piecemeal sales of segments that
would take more time to close and may cause the funds to be extended beyond their
horizons.
54
See In re Novell, Inc. S’holder Litig., 2013 WL 322560, at *9–10 (Del. Ch. Jan. 3, 2013)
(holding that the plaintiff stated a claim that the defendants breached their Revlon duties in
bad faith); Mills Acq. Co. v. Macmillan, Inc., 559 A.2d 1261, 1281 (Del. 1989) (observing
that an “auction was clandestinely and impermissibly skewed in favor” of management’s
preferred bidder).
15
raises these disclosure allegations as an independent basis for inspection and as a
response to West’s Corwin defense.
West responds that Lavin has failed to state a credible basis from which the
Court can infer that (1) the directors approved the Merger for self-interested reasons
or (2) Centerview suffered from disabling conflicts of interest. In framing its
argument, West separates Lavin’s disclosure allegations from his process
allegations. As to the disclosure allegations, West argues that our courts routinely
find that the kinds of “tell me more,” “tell me why,” or “tell me more about why”
disclosure allegations identified by Lavin fail to state actionable disclosure claims.
As to the process allegations, West argues that Corwin applies because a majority of
disinterested, informed, uncoerced stockholders approved the Merger. According to
West, this should end the inquiry. If the Court looks beyond the Corwin “cleansing,”
West contends that the Proxy clearly reveals that the deal process was sound and not
tainted by conflicts of interest.
For reasons discussed below, I am satisfied that Lavin has presented a credible
basis from which the Court can infer that West’s directors and officers may have
breached their fiduciary duties in favoring a sale of the Company as opposed to a
sale of its segments. In this regard, I reject West’s argument that “Corwin provides
the framework” for determining whether Lavin has met his burden to justify
16
inspection.55 As for the substance of Lavin’s claims of wrongdoing, the evidence he
presented in support of his process claims clears the very low bar set by the “credible
basis” standard of proof.56 His demand is too broad, however, and must be limited
to the books and records that are necessary and proper to assist him in pursuing his
investigation.
A. The Section 220 Standard
The standard for evaluating a demand for books and records under
Section 220 is well settled. A stockholder of a Delaware corporation may inspect
the corporation’s books and records for any “proper purpose” reasonably related to
the stockholder’s “interest as a stockholder.”57 The desire to investigate
55
Def. West’s Opening Br. 24; Def. West’s Answering Br. 5 (“[T]he heightened Corwin
standard provides the relevant framework under which to evaluate Plaintiff’s process-based
claims.”).
56
As noted, Lavin raised his disclosure claims as both an independent basis for inspection
and as a response to West’s Corwin argument. See Pl. Lavin’s Answering Br. 1. Because
I find that Corwin does not apply to bar the claim for inspection, and that Lavin has
presented a credible basis to infer wrongdoing related to the Merger process, I will not
consider his disclosure allegations further. For this reason, I likewise will not consider
West’s defenses to the disclosure allegations beyond observing that they improperly seek
to immerse the Court in merits defenses in what is quintessentially a summary proceeding.
See Def. West’s Opening Br. 16–23.
57
8 Del. C. § 220(b) (“A proper purpose shall mean a purpose reasonably related to such
person’s interest as a stockholder.”). West does not dispute that Lavin has satisfied the
“form and manner requirements.” See Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752,
775–76 (Del. Ch. 2016) (discussing “form and manner” requirements).
17
mismanagement or wrongdoing is a proper purpose.58 To prove that the stated
purpose is justified, the stockholder must demonstrate, by a preponderance of the
evidence, “a credible basis from which the court can infer that mismanagement,
waste or wrongdoing may have occurred.”59 The “credible basis” standard is the
lowest burden of proof known in our law; it merely requires that the plaintiff present
“some evidence” of wrongdoing.60 “A plaintiff seeking inspection must also prove
that ‘each category of books and records requested is essential and sufficient to [its]
stated purpose.’”61
B. Corwin Will Not Impede an Otherwise Properly Supported Demand
for Inspection
As stated, West maintains that Lavin must overcome its Corwin defense to
prevail on his inspection demand because the Merger was approved by a fully
informed, uncoerced vote of West’s disinterested stockholders. For the reasons
discussed below, I disagree. To explain why Corwin does not apply in the
58
Seinfeld v. Verizon Commc’ns, Inc., 909 A.2d 117, 121 (Del. 2006) (“It is well
established that a stockholder’s desire to investigate wrongdoing or mismanagement is a
‘proper purpose.’”).
59
Id. at 118 (internal quotation marks omitted).
60
Id. at 123 (“Although the threshold for a stockholder in a section 220 proceeding is not
insubstantial, the ‘credible basis’ standard sets the lowest possible burden of proof.”).
61
Henry v. Phixios Hldgs., Inc., 2017 WL 2928034, at *11 (Del. Ch. July 10, 2017)
(quoting Thomas & Betts Corp. v. Leviton Mfg. Co., 681 A.2d 1026, 1035 (Del. 1996)).
18
Section 220 context, it is helpful first to revisit Corwin, this Court’s faithful
application of the doctrine and the pleading burdens it imposes upon the plaintiff
who seeks to challenge a stockholder-approved merger or tender offer. With that
context in mind, the legal and policy reasons for rejecting West’s Corwin argument
in this proceeding become clear.62
In Corwin, our Supreme Court clarified the “long-standing” principle that a
voluntary, fully informed vote of disinterested stockholders to approve a transaction
not involving a controlling stockholder will trigger the business judgment rule
standard of review.63 This now-settled doctrine recognizes a sound policy
undergirding our corporate law: it is right to ratchet-down more intrusive judicial
review, in order “to avoid the uncertainties and costs of judicial second-guessing, [in
those instances where] the disinterested stockholders have had the free and informed
chance to decide on the economic merits of a transaction for themselves.”64 Given
62
I assume in this Opinion, without deciding, that the Company has standing to raise a
Corwin defense in this proceeding even though the defense is perhaps more properly
viewed as belonging to the Company’s board of directors. Neither party has raised the
standing issue, so I decline to consider it further.
63
125 A.3d at 306, 312–14 & n.19.
64
Id. at 313; see also id. (“When the real parties in interest—the disinterested equity
owners—can easily protect themselves at the ballot box by simply voting no, the utility of
a litigation-intrusive standard of review promises more costs to stockholders in the form of
litigation rents and inhibitions on risk taking than it promises in terms of benefits to
them.”); J. Travis Laster, The Effect of Stockholder Approval on Enhanced Scrutiny,
40 Wm. Mitchell L. Rev. 1443, 1457 (2014) (commenting that “a compromised board can
substitute the stockholders as the necessary qualified decision maker and, thereby, restore
19
the overwhelming stockholder vote approving the Merger, and the full embrace
Corwin has received by our courts, Lavin is wise to expect that West will raise a
Corwin defense should he elect to challenge the transaction in a plenary action.
Mindful of the challenge(s) to come, Lavin has invoked Section 220 as a
means to investigate his potential claims before he launches his formal complaint.
Here again, he has proceeded wisely. Following Corwin, commentators and litigants
questioned whether the stockholder plaintiff or the fiduciary defendants bore the
burden at the pleading stage to demonstrate that the stockholder vote was (or was
not) fully informed and uncoerced.65 Chancellor Bouchard recently provided the
definitive answer to the Corwin pleading burden question: the stockholder plaintiff
bears the burden of pleading facts that “identify a deficiency in the operative
disclosure document.”66 As Chancellor Bouchard explained, allocating the pleading
burden to the plaintiffs is “far more sensible” because the contrary rule would put
the protections of the business judgment rule” and that it is appropriate that “a court should
take into account and defer to an uncoerced endorsement from fully informed, disinterested
stockholders.”).
65
In re Solera Hldgs., Inc. S’holder Litig., 2017 WL 57839, at *7–8 (Del. Ch. Jan. 5, 2017).
66
Id. See also van der Fluit v. Yates, 2017 WL 5953514, at *7 (Del. Ch. Nov. 30, 2017)
(“[A] plaintiff challenging the decision to approve a transaction must first identify a
deficiency in the operative disclosure document.”) (quoting In re Solera Hldgs., 2017
WL 57839, at *8).
20
defendants in the “proverbially impossible position of proving a negative.” 67 Thus,
should the time come when Lavin must answer West’s Corwin defense, he will be
obliged to do so with well-pled facts in his complaint that support a reasonable
inference that the stockholder vote was uninformed or coerced. This is no easy
task.68
For over twenty years, Delaware courts have encouraged stockholders to use
the “tools at hand” (e.g., Section 220) to gather information before filing complaints
that will be subject to heightened pleading standards.69 Although our courts
67
In re Solera Hldgs., 2017 WL 57839, at *8 (citing Harbor Fin. P’rs v. Huizenga,
751 A.2d 879, 890 n.36 (Del. Ch. 1999). Chancellor Bouchard also observed that “[t]he
logic of [placing the pleading burden on plaintiffs] is borne out by the reality that this is
how ratification defenses in corporate sale transactions have been litigated in practice since
Corwin was decided, including in this case.” Id.
68
See Matthew D. Cain, Jill E. Fisch, Steven Davidoff Solomon & Randall S. Thomas,
The Shifting Tides of Merger Litigation, 71 Vand. L. Rev. (forthcoming 2018) (noting that
Corwin, among other decisions, has “made the prosecution of merger litigation cases more
difficult”). In the wake Corwin, this court has held stockholder plaintiffs to their pleading
burden in a manner that reflects fealty to the laudable policy at the heart of the doctrine it
solidified. See, e.g., In re Volcano Corp. S’holder Litig., 143 A.3d 727, 747 (Del. Ch.
2016) (granting motion to dismiss and noting that “[b]ecause stockholders representing a
majority of Volcano’s outstanding shares approved the Merger, Plaintiffs must plead facts
from which it reasonably can be inferred that those stockholders were interested, coerced,
or not fully informed in accepting the Tender Offer to avoid application of the business
judgment rule.”), aff’d, 156 A.3d 697 (TABLE); Larkin v. Shah, 2016 WL 4485447, at *20
(Del. Ch. Aug. 25, 2016) (dismissing complaint for failure to plead that the stockholder
vote was coerced or uninformed); In re Merge Healthcare Inc., 2017 WL 395981, at *13
(Del. Ch. Jan. 30, 2017) (same); In re Solera Hldgs., 2017 WL 57839, at *13 (same);
Chester Cty. Ret. Sys. v. Collins, 2016 WL 7117924, at *3 (Del. Ch. Dec. 6, 2016) (Order
Granting Motions to Dismiss) (same).
69
E.g., King v. VeriFone Hldgs., Inc., 994 A.2d 354, 356 (Del. Ch. 2010) (“For years, our
Supreme Court has made clear that derivative plaintiffs should seek books and records and
21
primarily direct that encouragement (or admonition) to stockholders who intend to
file derivative complaints where they will allege demand futility, the direction is
equally applicable to stockholders who intend to file class action suits challenging
transactions approved by a shareholder vote.70 Indeed, it would be naïve to believe,
in most instances, that the stockholder plaintiff will not face significant challenges
to meet her pleading burden in anticipation of a Corwin defense if all she has in hand
to prepare her complaint are the public filings of the company whose board of
directors she proposes to sue.71 That is precisely the dynamic that caused our courts
otherwise conduct an adequate investigation into demand excusal before rushing off to file
a derivative complaint.”), rev’d on other grounds, 12 A.3d 1140 (Del. 2011); Seinfeld,
909 A.2d at 120 (“The rise in books and records litigation is directly attributable to this
Court’s encouragement of stockholders, who can show a proper purpose, to use the ‘tools
at hand’ to obtain the necessary information before filing a derivative action.”); Sec. First
Corp. v. U.S. Die Casting & Dev. Co., 687 A.2d 563, 571 (Del. 1997) (“[A] Section 220
proceeding may serve a salutary mission as a prelude to a derivative suit.”); Rales v.
Blasband, 634 A.2d 927, 934 n.10 (Del. 1993) (suggesting that stockholders use, inter alia,
Section 220 as a means to gather information in anticipation of a derivative action).
70
See Compaq Comp. Corp. v. Horton, 631 A.2d 1, 4 (Del. 1993) (holding that Section 220
may be employed by a stockholder investigating a direct claim just as readily as when the
stockholder is investigating a derivative claim). To be sure, there are timing challenges
posed in the context of utilizing Section 220 in aid of direct claims challenging a merger
or tender offer transaction that typically do not exist in the derivative context. Even so,
Section 220 still can serve its purpose in the merger or tender offer context if the
stockholder moves promptly. See e.g., Cutlip v. CBA Int’l, Inc. I, 1995 WL 694422, at *2–
3 (Del. Ch. Oct. 27, 1995) (holding that plaintiffs did not lose standing to pursue a
Section 220 action where they filed suit before the merger closed); Deephaven Risk Arb
Trading Ltd. v. UnitedGlobalCom, Inc., 2005 WL 1713067, at *7–8 (Del. Ch. July 13,
2005) (same).
71
See Joel Edan Friedlander, Vindicating the Duty of Loyalty: Using Data Points of
Successful Stockholder Litigation as a Tool for Reform, 72 Bus. Law. 623, 644–48 (2017)
(addressing concerns that post-Corwin complaints often suffer from a lack of basic facts
22
to encourage use of the “tools at hand” in the derivative context. And it is precisely
the reason this court should encourage stockholders, if feasible, to demand books
and records before filing their complaints when they have a credible basis to suspect
wrongdoing in connection with a stockholder-approved transaction and good reason
to predict that a Corwin defense is forthcoming.
Moreover, the notion that the court would engage with Corwin, and all that it
entails, in a summary Section 220 proceeding has little to commend it as a matter of
procedure, at least in the view of this trial judge. Simply stated, Corwin does not fit
within the limited scope and purpose of a books and records action in this court.72
Our law is settled that stockholders seeking books and records under Section 220 for
the purpose of investigating mismanagement need not prove that wrongdoing or
mismanagement actually occurred.73 Thus, when a stockholder demands inspection
relating to the challenged transaction or attendant disclosures). I acknowledge that the
author ultimately concludes that Section 220 is a “pale substitute” for expedited discovery
in most deal litigation. Id. at 648. Even if that is so, as the poet John Heywood exhorted,
“somewhat is better than nothyng (sic).” John Heywood, Dialogue of Proverbs (1546).
72
Cf. Salberg v. Genworth Fin., Inc., 2017 WL 3499807, at *5–6 (Del. Ch. July 27, 2017)
(finding in a Section 220 proceeding that Corwin could not form the basis for challenging
the “colorability” of a claim under the Garner v. Wolfinbarger analysis).
73
See Thomas & Betts, 681 A.2d at 1031 (“[Stockholders] are not required to prove by a
preponderance of the evidence that waste and management are actually occurring.”);
Sec. First, 687 A.2d at 568 (same); Yahoo!, 132 A.3d at 780 (“To state what should be
obvious, the existence of a credible basis to suspect possible wrongdoing sufficient to
warrant further investigation does not mean that wrongdoing actually occurred. Even in
23
as a means to investigate wrongdoing in contemplation of a class or derivative
action, Delaware courts generally do not evaluate the viability of the demand based
on the likelihood that the stockholder will succeed in a plenary action.74 In the rare
circumstances where inspection rights have been denied based on an assessment of
the merits of the claim the stockholder seeks to investigate, the courts have
emphasized either that the claim was simply not “justiciable,”75 or that the claim on
Disney, where the complaint survived a motion to dismiss, the defendants ultimately
prevailed.”).
74
Wolst v. Monster Beverage Corp., 2014 WL 4966139 at *1–2 (Del. Ch. Oct. 3, 2014)
(“A potentially viable affirmative defense to an anticipated derivative claim will not
necessarily defeat a books and records effort. Sometimes developing the record to
withstand possible affirmative defenses requires more effort than is practicable for a books
and records action.”); La. Mun. Police Empls.’ Ret. Sys. v. Countrywide Fin. Corp.,
2007 WL 2896540, at *12 (Del. Ch. Oct. 2, 2007) (“[The defendant company] seeks to
litigate the ultimate issue in a possible future derivative suit that might eventually be filed
by [the plaintiff]. This is neither the time nor the procedural setting to address that issue.”);
Amalgamated Bank v. UICI, 2005 WL 1377432, at *2 (Del. Ch. June 2, 2005) (“The
potential availability of affirmative defenses to withstand fiduciary duty claims cannot
solely act to bar a plaintiff under Section 220.”); Marmon v. Arbinet-Thexchange, Inc.,
2004 WL 936512, at *6 (Del. Ch. Apr. 28, 2004) (“[Allowing merits-based defenses]
would turn on its head both § 220 and the case law upholding a books and records
inspection for the purpose of investigating mismanagement.”); Khanna v. Covad
Commc’ns Gp., Inc., 2004 WL 187274, at *6 (Del. Ch. Jan. 23, 2004) (“To engage in
the [merits-based burden-shifting analysis] would defeat the purposes of this summary
proceeding and the underlying policy guidance that potential plaintiffs use the procedures
of Section 220 to determine if a case exists for the shareholder to pursue.’”).
75
See, e.g., Se. Pa. Trans. Auth. v. AbbVie Inc., 2015 WL 1753033, at *13 (Del. Ch.
Apr. 15, 2015) (“[I]f a stockholder seeks inspection solely to evaluate whether to bring
derivative litigation, the corporate wrongdoing which he seeks to investigate must
necessarily be justiciable.”).
24
its face was not viable as a matter of law.76 In either event, it was clear to the court
that no amount of additional information would aid the stockholder in pleading or
prosecuting the contemplated plenary action, so the inspection demand was denied.77
Although our courts have not addressed whether a company may invoke
Corwin as a bar to inspection in a Section 220 proceeding, this court has rejected
similar attempts to invoke merits-based defenses that turn on doctrinal burden
shifting as a basis to defend otherwise properly supported demands for inspection.
For instance, in Khanna v. Covad Communications Group, the defendant argued that
the plaintiff could not demonstrate a credible basis to suspect wrongdoing because
the challenged transactions “were approved by a majority of directors whose
76
See id. (“Because a Section 102(b)(7) exculpatory provision serves as a bar to
stockholders recovering for certain director liability in litigation, a stockholder seeking to
use Section 220 to investigate corporate wrongdoing solely to evaluate whether to bring
derivative litigation has stated a proper purpose only insofar as the investigation targets
non-exculpated corporate wrongdoing.”); see also id. (citing Graulich v. Dell Inc., 2011
WL 1843813, at *5 (Del. Ch. May 16, 2011) (addressing time bar); Norfolk Cty. Ret. Sys.
v. Jos. A. Bank Clothiers, Inc., 2009 WL 353746, at *6 (Del. Ch. Feb. 12, 2009) (addressing
issue preclusion)). But see Yahoo!, 132 A.3d at 785–87 (discussing circumstances where
a Section 102(b)(7) defense will not defeat a books and records demand). I note that West’s
brief did make a passing reference in a footnote to the fact that West’s charter contains an
exculpatory provision. West made no real attempt to argue why that provision should bar
Lavin’s claim for inspection here. In any event, I note that the thrust of Lavin’s argument
is that there is a credible basis to suspect that directors and officers violated the duty of
loyalty in connection with the Merger. That claim, if ultimately viable, would not be
captured within Section 102(b)(7) or West’s exculpatory provision. Yahoo!, 132 A.3d at
785–87 (explaining that claims against officers and claims for breach of the duty of loyalty
are “not subject to exculpation”).
77
Id.
25
independence and disinterestedness are not fairly questioned by [the plaintiff].”78
The court disagreed:
The shareholder seeking to investigate corporate wrongdoing, if [the
defendant’s] analytical approach were adopted, would first be required
to survive the functional equivalent of a merits-based dismissal motion
in the substantive action. While the analysis to be undertaken in
considering those motions is, of course, important, the Section 220
action is not the proper forum for that analysis.79
Khanna correctly observed that a summary Section 220 proceeding is hardly the
proper setting to consider the nuanced factual and legal questions that are frequently
featured when the court is asked to apply Section 144 of the DGCL.80 The legal and
factual questions presented by a properly-invoked Corwin defense are no less
challenging.81
78
Khanna, 2004 WL 187274, at *6.
79
Id. The Supreme Court quoted Khanna approvingly in Seinfeld, 909 A.2d at 123.
80
8 Del. C. § 144(a); Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1134, 1154 (Del. Ch.
1994) (Allen, C.) (“[C]ompliance with the terms of Section 144 does not restore to the
board the presumption of the business judgment rule; it simply shifts the burden to plaintiff
to prove unfairness.”) (citing Kahn v. Lynch Commc’n Sys., 638 A.2d 1110 (Del 1994)).
81
West advances additional merits-based arguments to support its position that the Merger
was not the product of a conflict-driven process. Def. West’s Opening Br. 26–29 (citing,
inter alia, In re Synthes, Inc. S’holder Litig., 50 A.3d 1022, 1031 (Del. Ch. 2012); In re
Cyan, Inc. S’holders Litig., 2017 WL 1956955, at *10 (Del. Ch. May 11, 2017); Larkin,
2016 WL 4485447, at *16–17). For the reasons discussed above, these merits-based
arguments are premature and should be saved for whatever plenary action Lavin or other
stockholders may choose to file. See, e.g., Marmon, 2004 WL 936512, at *6 (“[Allowing
merits-based defenses] would turn on its head both § 220 and the case law upholding a
books and records inspection for the purpose of investigating mismanagement.”).
26
In rejecting West’s argument that I should take up its Corwin defense now as
a basis to deny Lavin’s Section 220 demand, I do not mean to diminish the pleading
stage business judgment deference that must be afforded fiduciaries whose decisions
are approved by properly informed disinterested stockholders freely exercising their
right to vote their shares. Nor do I intend to suggest that the fiduciaries Lavin may
choose to name in a plenary action will not prevail should they invoke Corwin in a
motion to dismiss Lavin’s complaint. At this stage, I am simply recognizing that
Lavin will bear a burden to be precise in his pleading should he challenge the
stockholder vote approving the Merger. Documents he receives under Section 220
may enable him to prepare a better complaint. That, in turn, will assist the court in
making an informed decision as to whether a viable breach of fiduciary duty claim
exists.82
C. Lavin’s Proper Purposes
Lavin’s primary purpose in seeking the Company’s books and records is to
investigate whether West’s directors and officers breached their fiduciary duties by
approving a sale of West to Apollo for an inadequate price. If an investigation
82
I note that Lavin has timed his Section 220 demand appropriately. Had he waited to
initiate this action until after he brought his plenary action, not only would his complaint
lack the fruits of his Section 220 yield, he also likely would be deemed to have improperly
employed Section 220 as a substitute for discovery. See Khanna, 2004 WL 187274, at *9
(“A Section 220 action is not a substitute for discovery under the rules of civil procedure.”)
(citing Saito v. McKesson HBOC, Inc., 806 A.2d 113, 117 n.10 (Del. 2002)).
27
reveals wrongdoing, he intends to institute litigation against the directors, officers
and possibly others, including Apollo. He also seeks books and records related to
director independence. To prevail, Lavin must have presented “some evidence” of
mismanagement or wrongdoing.83
1. The Evidence Reveals a Credible Basis to Infer Wrongdoing
As Lavin established at trial, the evidence provides a credible basis from
which the Court can infer that TH Lee, Quadrangle and West’s management may
have caused the Board to steer the Merger process in a way that benefited their own
interests at the expense of the other shareholders.
First, Lavin presented a credible basis in the evidence to infer that West’s
directors and officers knew a sale of West’s business segments would provide the
most value to the shareholders even though the shareholders may not have been able
to appreciate the distinction.84 Lavin points to the Proxy where the Board discloses
83
Seinfeld, 909 A.2d at 118 (explaining that the credible basis standard is the equivalent of
“some evidence” of wrongdoing).
84
This court has observed that a board’s failure adequately to consider a break-up and sale
of parts or divisions may constitute a breach of the duties of care and loyalty under Revlon.
In re El Paso Corp. S’holder Litig., 41 A.3d 432, 445 (Del. Ch. 2012) (discussing how the
failure to test the market for possible sale of “business units is, of course, relevant to any
Revlon inquiry,” and “that [the] failure was compounded by a deal protection package”);
In re Celera Corp. S’holder Litig., 2012 WL 1020471, at *26 (Del. Ch. Mar. 23, 2012)
(holding that plaintiffs presented a viable claim that defendants breached fiduciary duties
under Revlon by “selling the Company as a whole” instead of selling its divisions in
separate transactions), aff’d in part, rev’d on other grounds, 59 A.3d 418 (Del. 2012); Ryan
v. Lyondell Chem. Co., 2008 WL 2923427, at *15–16 (Del. Ch. July 29, 2008) (denying
defendants’ motion for summary judgment, in part, because there was a genuine dispute as
28
that in July 2016, “the Board, Centerview and Company management observed that
West’s various segments exhibit differing financial profiles and, as a result, investors
may have difficulty giving appropriate value to the Company’s individual segments
or the Company as a whole.”85 While stockholders might not have appreciated the
value of selling off the business segments separately, the evidence suggests that,
prior to the Merger, the Board may have been thinking along these lines after
reviewing and then presenting “Sum of the Parts Valuation Metrics” as part of its
presentation at the “Analyst Day” meeting in 2016.86 Potential buyers likewise
appreciated that a sale of West’s business segments may have been more valuable
to whether they breached their fiduciary duties by disregarding “the possibility of breaking
[the company] up into more valuable parts, particularly given [its] unique market niche and
[the CEO’s] assessment that few companies would be interested in acquiring [the
company] in toto.”), rev’d, 970 A.2d 235, 243 (Del. 2009) (holding that plaintiffs failure
to show that defendants acted in bad faith was dispositive, but the Court of Chancery’s
decision would have been upheld if the issue “were whether the directors had exercised
due care”).
85
JX 5 (Proxy) at 30.
86
JX 16 (Form 8-K) at 49; see also JX 5 (Proxy) at 29 (“[In the beginning of 2016] [t]he
Board instructed Company management to begin an evaluation of each of the Company’s
segments, both individually and as a whole, including the creation of five-year financial
projections for the Company and its segments. . . . Beginning in the spring of 2016 and
continuing into the fourth quarter of 2016, Company management continued its business
and financial analysis of each of the Company’s segments, including a review of the
competitive landscape, market trends, growth opportunities, profitability, margins,
products and services of each segment.”).
29
than a whole-company sale,87 as revealed in the fact that at least two bidders (Party H
and Party L) made sizable offers for certain of West’s segments.88 This is “some
evidence” from which the Court can infer that the Board and its high-level officers
may have believed that a sale of separate business segments would have yielded
more value to West’s shareholders than a sale of the whole company.89
Second, Lavin presented some evidence from which the Court can infer that
TH Lee and Quadrangle pushed the Board towards a sale of the Company in
furtherance of their own interests to the detriment of West’s stockholders. At the
time of the Merger, TH Lee and Quadrangle had been West stockholders since 2006,
meaning their investments were likely approaching their horizons.90 There is no
87
JX 5 (Proxy) at 32–35 (showing several third parties expressing interest in all of West’s
segments).
88
JX 5 (Proxy) at 35.
89
As noted, the Merger Agreement’s no-shop provision also may have prevented a more
valuable sale of segments from occurring. See JX 5 (Proxy) at 8, 85–87.
90
See Usha Rodrigues & Mike Stegemoller, Exit, Voice, and Reputation: the Evolution of
SPACS, 37 Del. J. Corp. L. 849, 853 (2013) (“To prevent the manager from merely sitting
on the money, the [private equity] fund faces a limited investment horizon; after ten years,
investors get their money back.”); Mark J. Roe, Corporate Short-Termism—In the
Boardroom and in the Courtroom, 68 Bus. Law. 977, 987–88 (2013) (noting that private
equity funds “often [have] time horizons of years, sometimes stretching toward a decade”);
Brian Cheffins & John Armour, The Eclipse of Private Equity, 33 Del. J. Corp. L 1, 11
(2008) (“Most private equity funds are established for a fixed term, typically ten years,
consisting of an investment period when the general partners make capital calls and a
holding period where existing investments are managed, developed, and ultimately sold.
Unless an extension is secured, when the term has expired, the fund must sell its
investments and return the capital to fund investors.”).
30
question that the private equity funds’ managers served on the Board (Huber, DiNovi
and Grattan). And there is no question that the funds had a contractual right to seat
two additional directors which, if exercised, would result in their control of half the
Board. TH Lee and Quadrangle may also have had a degree of control over Sloma
and Garcia, as these two directors were appointed to the Board while the funds
controlled the Company and maintained a contractual right to control the Board
composition.91 The funds had been in liquidation mode leading up to the time West
started receiving expressions of interest,92 and they agreed to leave money on the
table in the Merger—$3–$5 million for an employee retention plan—in order to get
the deal across the finish line.93 Thus, there is some evidence that TH Lee and
91
JX 8 (Annual Meeting Proxy) at 5; JX 9 (West’s Prospectus) at 80. I reject West’s
contention that Lavin waived his argument regarding TH Lee’s and Quadrangle’s alleged
control over half the Board. The doctrine of waiver operates to ensure fairness by requiring
that notice be given to the adverse party. See PharmAthene v. SIGA Tech., Inc., 2011
WL 6392906, at *2 (Del. Ch. Dec. 16, 2011) (“The general rule . . . that a party waives any
argument it fails properly to raise shows deference to fundamental fairness and the common
sense notion that, to defend a claim or oppose a defense, the adverse party deserves
sufficient notice of the claim or defense in the first instance.”). Lavin presented this issue
squarely in his opening brief. This provided West plenty of notice of the claim and more
than a fair opportunity to address it at trial. See Pl. Lavin’s Opening Br. 4–5, 14–15, 25.
It is also clear from Lavin’s initial demand for inspection that he was concerned about
TH Lee’s and Quadrangle’s ability to pressure the Board. JX 3 (Lavin’s Demand to Inspect
Books and Records) at 4.
92
E.g., JX 10 (West March 2015 Secondary Offering Prospectus Supplement).
93
JX 5 (Proxy) at 39 (“DiNovi noted that THL and Quadrangle would be willing to provide
between $3 million and $5 million (in the aggregate) of their proceeds from the transaction
to fund an additional retention plan for the Company’s senior management, payable at the
closing of the transaction.”).
31
Quadrangle desired and obtained a prompt liquidation of their aging investments for
a price that may have been unfair to the other stockholders.94
Third, Lavin presented some evidence from which the Court can infer that the
directors and high-level officers had financial incentives to approve a sale of the
Company even if a sale of its segments offered more value. Barker, the Chairman
and CEO, was set to receive a golden parachute payment of approximately
$19 million plus millions more in equity awards in the event the Company was sold
as a whole. And each of the non-employee directors was set to receive
approximately $200,000 for a sale of the Company as a whole, which they otherwise
might not have received if the Company continued on a standalone basis or sold its
segments.95 From this evidence, there is a credible basis to infer that the directors
94
West argues that TH Lee and Quadrangle could have engaged in another secondary
offering or distributed their holdings in kind to their limited partners if they needed to wrap
up their investment in West. Although that may be true, Lavin has presented some
evidence that these courses of action may not have been preferable when compared to a
prompt whole-company sale that resulted in both immediate liquidity and a premium to the
trading price. The other options that West presents could have resulted in less value to the
funds and their limited partners. See JX 5 (Proxy) at 45 (“[I]f the Company did not enter
into the merger agreement, [TH Lee and Quadrangle] could elect to distribute their shares
of West common stock to their limited partners, which could have a negative impact on the
Company’s stock price.”); JX 12 (Yahoo! Finance Chart) (showing drops in West’s stock
price following secondary offerings).
95
West argues that the awards to the independent directors is not evidence of anything
because they would have received equity grants regardless of whether vel non the Merger
occurred (Tr. at 58:23–59:6). But the Merger resulted in the vesting of restricted stock
units plus a cash award. JX (Proxy) 5 at 58. It is reasonable to infer that the non-employee
directors’ stock units would have remained restricted if the Merger did not close, because
32
faced two options—a sale of the Company as a whole or a more valuable sale of its
segments—and they pursued the less valuable option that provided benefits to them
that were not enjoyed by the other shareholders.
With the low Section 220 evidentiary threshold very much in mind, I am
satisfied that Lavin has presented “legitimate issues of wrongdoing.”96 Stated
differently, Lavin has presented “some evidence” that West’s directors and officers
may have breached their Revlon duties, possibly in bad faith.97 Accordingly, he has
stated a proper purpose to inspect certain documents related to the Merger process.98
otherwise there would have been no point to allowing those units to vest “as a result of the
merger.” JX 5 (Proxy) at 57–58.
96
Sec. First Corp., 687 A.2d at 568 (“[T]he threshold may be satisfied by a credible
showing, through documents, logic, testimony or otherwise, that there are legitimate issues
of wrongdoing.”).
97
See In re El Paso, 41 A.3d at 445 (noting that failure to “do a soft check of the market
[for the target company’s] attractive business units is, of course, relevant to any Revlon
inquiry, but particularly when questions of loyalty exist,” and that the failure was
“important because it was clear that the most valuable alternative to the Merger . . . was
likely a sale of El Paso’s two main businesses to separate buyers (the kind of break-up that
was de rigeur in the 1980s), or a sale of one business while retaining the other as a
standalone public company (a twist on the spin-off)”); In re Netsmart Tech., Inc. S’holder
Litig., 924 A.2d 171, 198–99 (Del. Ch. 2007) (finding that plaintiffs demonstrated
reasonable probability of success in a Revlon claim observing that the board “rapidly
narrowed its options to a channel consistent with [the directors’ personal] incentives” by
pursuing a deal with private equity bidders over a strategic buyer).
98
West offers Marathon P’rs, L.P. v. M&F Worldwide Corp. as comparable to this case
and argues that Lavin has presented only “speculation of mismanagement.”
2004 WL 1728604, at *7 (Del. Ch. July 30, 2004). Marathon is distinguishable on its facts,
as the plaintiff in that case suspected the directors breached their Revlon duties when they
rebuffed a single overture outside of any bidding process. Id. Unlike Marathon, this case
involves a company that was actually “in play” and Lavin has presented some evidence
33
2. Director Independence
In the midst of proving his credible basis to suspect wrongdoing in connection
with the Merger process, Lavin also demonstrated that he has a proper purpose to
investigate director independence. It is well established that the desire to investigate
director independence is a proper purpose.99 Such an inspection is especially proper
in this case because Lavin has shown that there is a credible basis to question whether
TH Lee and Quadrangle, as a practical matter, controlled half of the Board.100
D. Scope of Production
Lavin seeks to inspect thirteen categories of books and records that he claims
“address the crux” of his stated purposes.101 Some of these materials are warranted;
others are not. Specifically, I am satisfied that the following categories of documents
that those at the levers of control may have steered the sale process in a direction that
benefited them personally.
99
As observed in Amalgamated Bank v. Yahoo!, our courts routinely conclude that a
stockholder states a proper purpose when he seeks to investigate director independence and
disinterestedness. 132 A.3d at 784–85 (“[T]he Delaware Supreme Court has indicated that
a plaintiff could obtain ‘a file of the disclosure questionnaires for the board’ or similar
materials that could ‘provide more detail about the thickness of the relationship[s]’ in the
boardroom.”) (citing Del. Cty. Empls.’ Ret. Fund v. Sanchez, 124 A.3d 1017, 1024
(Del. 2015)).
100
See, e.g., JX 7 (S’holder Agreement) at 2 (showing that TH Lee and Quadrangle have a
contractual right to appoint five of West’s ten directors).
101
Pl. Lavin’s Opening Br. 27 (quoting Wal-Mart Stores, Inc. v. Ind. Elec. Works Pension
Tr. Fund IBEW, 95 A.3d 1264, 1271 (Del. 2014)).
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are “necessary and essential”102 to pursue Lavin’s proper purposes, as determined
above:
(1) Sum-of-the-parts metrics, analyses and presentations that were
provided to the Board by Centerview or West’s officers from January 1,
2016 to July 26, 2017; (2) indications of interest, offers, terms sheets
and draft agreements that West received from or exchanged with
bidders from January 1, 2016 to July 26, 2017, whether related to a
potential sale of the Company as a whole or a sale of its segments;
(3) Board minutes related to indications of interest and offers to
purchase the Company’s segments from January 1, 2016 to July 26,
2017; (4) books and records reflecting communications related to a
potential sale of one or more of West’s segments between Barker, Jan
Madsen, David Treinen, DiNovi or Huber, on the one hand, and any
officer, director, employee or agent of Centerview or any potential
acquirer of any part of the Company, on the other hand, from January 1,
2016 to July 26, 2017, including (but not limited to) emails, memoranda
and notes;103 and (5) materials provided to the Board or any of its
committees from January 1, 2016 to July 26, 2017 concerning the
independence or disinterestedness of any director, including any
disclosure questionnaires.
Because many of Lavin’s document demands landed with the precision of
buckshot,104 I have awarded inspection of only those documents that are necessary
102
Wal-Mart Stores, 95 A.3d at 1278 (discussing the “necessary and essential” standard).
103
See Yahoo!, 132 A.3d at 791–94 (ordering the production of targeted electronic
documents and emails because they were “corporate records” that would “show what [key
players] knew and when”).
104
Id. at 776 (“The production order ‘must be carefully tailored.’ Framed metaphorically,
it should be ‘circumscribed with rifled precision’ to target the plaintiff’s proper purpose.”)
(quoting Sec. First, 687 A.2d at 565, 570). For instance, Lavin seeks “all books and records
provided to or referred by the individuals who drafted the [Proxy],” “all documents
produced to any other stockholder or their counsel in response to a demand” under
Section 220 and “all books and records reflecting communications between [six officers
and directors] and any officer, director, employee or agent of Centerview, LionTree
35
to enable him to pursue the proper purposes articulated in his inspection demand.
To reiterate, the credible basis to suspect wrongdoing here raises the question of
whether the Board, for self-interested reasons, favored a less valuable sale of the
Company over a more valuable sale of its segments. The relevant time period
implicated by this question is January 2016 through July 2017—the period
beginning when third-parties first expressed interest and the Board began
contemplating strategic transactions, and ending with the stockholder vote
approving the Merger.105 The documents in the permitted categories will allow
Lavin to investigate whether the Board knew a sale of segments separately would be
more valuable to stockholders than the Merger, and whether the Board pursued the
Merger nevertheless for the benefit of its members, senior management, and private
equity investors and to the detriment of the other stockholders. When measured
against the Proxy, the documents may also offer some insight into whether the
stockholder vote was fully informed as Lavin attempts to meet his pleading burden
in anticipation of a Corwin defense.
Advisors, LLC . . . Apollo, or any other potential acquiror of the Company or any part
thereof.” Lavin’s Opening Br. 28–39 (citing JX 3 (Lavin’s Demand to Inspect Books and
Records)) (emphasis supplied).
105
See JX 5 (Proxy) at 29; JX 13 (West’s Form 8-K filed July 27, 2017) at 2.
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III. CONCLUSION
For the foregoing reasons, a judgment shall be entered in favor of Lavin that
directs the Company to allow inspection of the books and records designated in this
Opinion. Lavin shall submit a proposed implementing order and final judgment on
notice to West within ten (10) days.
IT IS SO ORDERED.
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