Delaware Court of Chancery Holds that Cancellation of Shares Through Merger Deprives Stockholder of Standing in Section 220 Action
In Weingarten v. Monster Worldwide, Inc., C.A. No. 12931-VCG, 2017 WL 752179 (Del. Ch. Feb. 27, 2017), the Delaware Court of Chancery (Glasscock, V.C.) clarified when a plaintiff has standing to vitiate inspection rights under Delaware General Corporation Law Section 220, 8 Del. C. § 220. In a case of first impression, the Court decided that the language of Section 220(c) does not confer standing to a former stockholder bringing an action to exercise his or her inspection rights after the former stockholder’s shares were canceled in a merger. To reach this conclusion, the Court relied upon the plain meaning of the statute, eschewing policy arguments from both parties.
Monster Worldwide Inc. (“Monster”) provides job placement, career management and human resource services. On August 8, 2016, Monster entered into a merger agreement with Randstad, where Randstad, through a subsidiary, would acquire Monster stock in a tender offer. The tender offer expired on October 28, 2016, and on November 1, 2016, any remaining stock (not subject to exercise of appraisal rights) was canceled and converted to cash.
On October 19, 2016, before the consummation of merger and the subsequent cancellation of his stock, petitioner sent a Section 220 inspection demand to Monster. He demanded to inspect the books and records to determine whether “it was appropriate to pursue litigation” against Board members in connection with the merger. Monster rejected the demand letter a week later. The same day, petitioner attempted to have Monster produce documents voluntarily and asked it to waive any standing defense. In reply, on October 28, 2016, Monster declined to produce documents voluntarily and decided not to waive any defenses. After the consummation of the merger days later, Monster told petitioner that “there was nothing further to discuss.”
Petitioner then filed his action to compel inspection of books and records. Monster moved to dismiss, arguing that petitioner (1) lacked standing because he was not a Monster stockholder post-merger and (2) failed to state a proper purpose for the demand. Petitioner responded that Monster (1) should be equitably estopped from challenging his standing and (2) the merger closing did not affect his standing to pursue his complaint.
In its decision dismissing the action, the Chancery Court first addressed petitioner’s equitable estoppel claim. To invoke equitable estoppel in Delaware, the Court held that a party must show “(1) it lacked knowledge or the means of obtaining knowledge of the truth; (2) it reasonably relied on the conduct of the party against whom estoppel is sought, and; (3) it detrimentally changed position based on that reliance.” Petitioner argued that he relied upon Monster’s silence when Monster did not reply to his request to waive standing defenses and his threat to bring a lawsuit. These actions, the Court held, did not constitute conduct upon which petitioner could rely — let alone reasonably. As a result, Monster was not equitably estopped from pursuing a standing defense.
The Court then turned to the central issue of the case: whether petitioner had standing to bring an action under Section 220 after his stock was cancelled through the merger. Section 220 allows a stockholder to inspect books and records of the corporation in certain circumstances. Section 220(a) defines a stockholder as “a holder of record of stock in a corporation.” Section 220(b) then explains that such a stockholder must make a written demand under oath stating a proper purpose for inspection of the records of the corporation. If the corporation rejects the written demand or does not respond within 5 days, then the stockholder may apply to the Chancery Court for relief under the parameters of Section 220(c).
Section 220(c) requires that that the stockholder establish that “(1) such stockholder is a stockholder; (2) such stockholder has complied with this section respecting the form and manner of making demand for inspection of such documents; and (3) the inspection is for a proper purpose.” If the stockholder can establish those three things, then the corporation has the burden to show the purpose was not proper in order to prevent inspection of the books and records.
In construing the statute, the Court hewed closely to the plain meaning of the text to “give effect to the expressed intent of the legislature.” The Court first agreed that petitioner had satisfied Section 220(b) requirement, permitting him to seek relief under Section 220(c). However, the Court found that Weingarten could not meet the requirements of 220(c). Calling the language of the statute “plain and ambiguous,” the Court emphasized that the statute requires a plaintiff “to demonstrate that it ‘has’ — past tense — complied with the demand requirement and ‘is’ a stockholder . . . .” The Court concluded through the use of past and present tense, the legislature “made clear” that only stockholders at the time of filing have standing to pursue a Section 220(c) action. The Court then distinguished cases where a plaintiff loses his or her stock in a merger during the pendency of the action, pointing out that at the time of filing, unlike here, such plaintiffs were then-present stockholders. Because petitioner was not a stockholder as defined by Section 220 when he commenced his action, he did not have standing.
Weingarten makes clear that Section 220, while an important “tool at hand” for stockholders in connections with fiduciary duty litigation, is of relatively little use for stockholders of targets in merger litigation. Stockholders will need to pursue Section 220 rights aggressively, before a merger closes, in order to maintain standing.