Chancery Court Grants Certain Books And Record Demands By Minority Stockholder Related To A Merger And Valuation Of Underlying Assets
In Mudrick Capital Management, L.P. v. Globalstar, Inc., C.A. No. 218-0351-TMR (Del. Ch. July 30, 2018), plaintiff Mudrick Capital Management L.P. (“Mudrick Capital”), a minority stockholder of defendant Globalstar, Inc. (the “Company”), brought a demand under Section 220 of the Delaware General Corporate Law (“Section 220”) to inspect certain communications and documents relating to the Company’s proposed merger with Thermo Acquisitions, Inc. (“Thermo”). The Delaware Court of Chancery granted Mudrick Capital’s demand for certain emails, communications and valuation materials relating to the merger, and denied Mudrick Capital’s demand for certain internal draft materials.
The Company is a provider of mobile satellite voice and data services, and the majority of its shares are indirectly held by James Monroe, who also serves as its CEO. Despite liquidity concerns, in 2017 the Company’s board of directors (the “Board”) created a special committee (the “Special Committee”) to investigate, negotiate, and approve or disapprove a merger transaction with Thermo (also controlled by Mr. Monroe). In April 2018, the Special Committee and the Board unanimously approved the merger. Under the merger terms, the Company will receive nearly 100% of the outstanding membership interests of FiberLight LLC (“FiberLight”), which the Special Committee appeared to value at approximately $1.245 billion, and cash and certain other shares and assets valued at approximately $400 million. Thermo stockholders will receive Company common stock valued at approximately $1.645 billion, which under the merger terms would require the Company to issue between 2 billion and 3.2 billion shares. Under the terms, Mr. Monroe’s stake in the Company will rise significantly, while Mudrick Capital and other minority shareholders will be significantly diluted.
Following the merger announcement, Mudrick Capital raised concerns about the transaction, including its belief that undervalued Company shares were being exchanged for significantly overvalued FiberLight assets (a failed sale of FiberLight interests in 2016 showed a valuation of only $350 to $450 million). Mudrick Capital sent a Section 220 demand to the Company, listing seven purposes (including possible breaches of fiduciary duty; evaluation of the fairness of the merger and independence of the Special Committee members; valuation of Mudrick Capital’s stock in the Company; and communication with other minority stockholders). Following filing of this demand, the Company produced a number of documents, conceding that six of the seven purposes were proper (and all documents requested fell within one of the properly stated purposes). However, Mudrick Capital asserted that the Company’s production of documents was deficient and sought additional documents.
Under Section 220, stockholders of a Delaware corporation must state a “proper purpose” to inspect books and records, with the scope of the inspection to be limited only to those books and records which are “necessary and essential to accomplish the stated, proper purpose”. Delaware courts have found that documents are “necessary and essential” pursuant to a Section 220 demand if they address the “crux of the shareholder’s purpose” and if that information is “unavailable from another source”. The burden of proof in a Section 220 demand is on the party seeking inspection.
Jason Mudrick testified in support of Mudrick Capital’s demand, detailing issues he discovered that were not fully addressed in the documents produced by the Company, or that suggested there were additional relevant documents that had not been produced. These included little or no explanation of the FiberLight valuation; brief negotiations and limited information included in the Board and Special Committee minutes (contradicting information provided by outside advisors to the Special Committee); and references in the produced documents to various conversations on these subjects.
The Court found that the testimony and produced documents suggest communications exist but have not been produced that directly relate to Mudrick Capital’s accepted purposes. Thus, the Court determined that Mudrick Capital was entitled to receive all emails within a specified pre-merger timeframe from certain individuals shown to be integrally involved in the merger negotiations or who were in possession of many of the documents. While the Court granted that board level documents are normally the starting point for such an investigation, production of additional documents (including emails) in this case is warranted because the documents produced by the Company do not allow Mudrick Capital to adequately address its stated purposes, and the produced documents also show other documents exist, including emails, that address the crux of the stated purposes and are unavailable from another source.
The Court also determined that Mudrick Capital was entitled to receive documents and communications relating to the valuation of FiberLight. Given the Special Committee’s valuation at $1.245 billion, compared with FiberLight’s failure to sell for $350 million in 2016, the Court determined that valuation materials would be necessary and essential for several of Mudrick Capital’s stated purposes. The Court also noted that as FiberLight is a privately held company, such valuation information would be difficult if not impossible to obtain from another source (and even if this was possible, external information would not explain how the Special Committee reached its higher valuation).
The Court determined that Mudrick Capital was not entitled to receive certain draft materials, including draft Special Committee minutes and internal drafts of the merger documents. The Court found that Mudrick Capital did not provide convincing evidence that the draft versions of these documents would be less “sanitized” than the final versions, or necessary in light of all the other documents received or to be received. The Court further noted in a footnote that a corresponding analysis of privilege issues relating to such draft materials is thus not required.
Finally, the Court ordered the Company to produce a privilege log reflecting documents withheld or redacted for any privilege reasons.