Court of Chancery Holds That Corwin Defense Is Not Appropriate for the Limited Scope and Purpose of a Books and Records Action Under Section 220
In Lavin v. West Corporation, C.A. No. 2017-0547-JRS (Del. Ch. December 29, 2017), the Court of Chancery held that stockholder plaintiff Mark Lavin (“Lavin”) had adequately demonstrated a credible basis from which the Court could infer that wrongdoing had occurred regarding the merger of West Corporation (the “Company”) and Apollo Global Management (“Apollo”) in support of Lavin’s Section 220 demand for inspection, and that a Corwin defense (that the transaction at issue was approved by a majority of disinterested and informed stockholders) is not a bar to an otherwise properly supported Section 220 demand for inspection.
The Company was a provider of communication and network infrastructure services, provided through four different business segments varying in size and annual revenue. Two private equity companies, Thomas H. Lee Partners, L.P. (“TH Lee”) and Quadrangle Group LLC (“Quadrangle”), owned a collective 70% of the Company’s common stock, and entered into a stockholder agreement with the founders and the Company before taking the Company public in 2013. Pursuant to the stockholder agreement, TH Lee had the right to elect up to four directors as long as it held greater than 50% of the shares it held as of the IPO date, and Quadrangle had the right to elect one director as long as it held at least 25% of the shares it held as of the IPO date.
In early 2016, the Company began to consider a sale of the Company or its business segments. A formal sales process was initiated, during which bids were submitted for both the entire Company or individual business segments. During this time the Company received the following offers, among others: (1) one offer ranging from $2.4 billion to $2.6 billion for all but one business segment, (2) one offer to purchase a certain segment of the Company for $2.36 billion, and (3) one offer to purchase the entire company for $2 billion. Ultimately, the Company accepted the third offer, and entered into an Agreement and Plan of Merger with affiliates of Apollo (the “Merger”) on May 9, 2017. The Schedule 14A Proxy Statement (the “Proxy”) was distributed on June 27, 2017. After five putative class action complaints were filed alleging federal securities law violations and material omissions, the Company filed a supplement to the Proxy in advance of the stockholder vote. On July 26, 2017 the vast majority of the stockholders voted in favor of the Merger.
On July 19, 2017, Lavin sent a Section 220 demand to inspect the Company’s books and records to “determine whether wrongdoing and mismanagement had taken place” and to “investigate the independence and disinterestedness” of the Company’s directors. The Company rejected Lavin’s demand on July 26, 2017 for failure to articulate a credible basis for suspected wrongdoing and for an overbroad inspection demand. Lavin filed a Verified Complaint to Compel Inspection of Books and Records on July 27, 2017.
Lavin alleged that a credible basis existed to infer that, for self-interested reasons, the Company’s directors “favored a less valuable sale of the Company over a more valuable sale of its parts.” Specifically, Lavin presented evidence that (1) the Company’s directors and officers knew a sale of the separate business segments would provide the most value to the stockholders, (2) at the time of the Merger, TH Lee and Quadrangle desired a prompt liquidation of their investments, which may have influenced the Board, (3) the Company’s CEO and non-employee directors all had personal financial incentives, in the form of bonus payments, to approve the transaction with Apollo even if a sale of the separate segments offered more overall value, and (4) the Board failed to disclose material information in the Proxy. Lavin also alleged a proper purpose to investigate director independence due to TH Lee’s and Quadrangle’s potential control over half of the Board.
Regarding Lavin’s proxy allegations, the Company argued that a simple desire to know more failed to state an actionable disclosure claim. With respect to Lavin’s process allegations, the Company argued that Corwin applied “because a majority of disinterested, informed, uncoerced stockholders approved the Merger.” The Court disagreed. Although the Court had not previously addressed the issue of whether a company may invoke Corwin as a bar to inspection in a Section 220 proceeding, the Court noted that Delaware law was settled that stockholders seeking books and records need not prove wrongdoing or mismanagement, and that the Court has consistently rejected attempts to invoke merits-based defenses to defend otherwise properly supported demands for inspection. The Court ruled that Corwin does not fit within the limited scope and purpose of a books and records action under Section 220. Rather, a Corwin defense would be more appropriately raised in any subsequent direct or derivative litigation filed by Lavin.
The Court ruled in favor of Lavin, stating that he had satisfied his burden of proof by presenting evidence supporting two proper purposes: (1) the Company’s directors may have breached their duties to the company, potentially in bad faith and (2) the Company’s directors may not have been independent from TH Lee and Quadrangle. The Court did, however, narrow the scope of production, and named only certain categories of documents to be produced, those deemed “necessary and essential” to Lavin’s proper purposes.
Lavin v. West Corporation, C.A. No. 2017-0547-JRS (Del. Ch. December 29, 2017)