Caspian Select Credit Master Fund Ltd. v. Key Plastics Corp., C.A. No. 8625-VCN (Del. Ch. Feb. 24, 2014) (Noble, V.C.)
In this letter opinion, the Court of Chancery granted plaintiff’s request for books and records pursuant to 8 Del. C. § 220. The stockholder plaintiff sought, among other things, to value its equity holding in Key Plastics Corporation (“Key Plastics” or the “Company”) and to investigate alleged wrongdoing in connection with the Company’s existing debt facilities. In granting inspection, the Court held that an amendment to the Company’s term loan facility with one of its controlling stockholders that included an increased interest rate when other financing options may have been available established a credible basis to infer mismanagement and supported a proper purpose for plaintiff’s demand.
Plaintiff is the sole minority investor of Key Plastics, a closely-held portfolio company, which, together with its affiliate, supplies automotive components. The remainder of the Company’s shares are held by two related funds managed by Wayzata Investment Partners LLC (“Wayzata”). In 2008, Key Plastics filed a Chapter 11 prepackaged bankruptcy plan. Before the Company’s bankruptcy, plaintiff and certain Wayzata funds purchased senior secured notes offered by the Company. Under the bankruptcy plan, those senior notes were converted into equity of the reorganized Key Plastics. The Company also entered into a Stockholders Agreement, which required, among other things, the Company to provide to its stockholders annual audited financial statements and certain quarterly financial reports.
In 2009, the Company entered into a term loan facility with one of its controlling stockholders – a Wayzata fund. The facility was later amended to increase the borrowing amount and extend the maturity date. In January 2012, the parties again amended the term loan to increase the borrowing amount and extend its expiration. That amendment, however, also increased the interest rate of the loan. Meanwhile, plaintiff continued to obtain financial reports from the Company until communications ceased in March 2012. At that time, plaintiff unsuccessfully sought additional information from the Company in order to value its equity stake. Plaintiff ultimately proposed a price at which it could be bought out, but the Company countered with a price that was low enough to end negotiations.
In April 2013, plaintiff delivered a demand pursuant to Section 220 to, among other things, investigate alleged waste and mismanagement with respect to the Company’s debt facilities, determine whether the controlling stockholders had engaged in self-dealing, and value its equity holding. Key Plastics denied plaintiff’s demand, asserting that it had failed to present a credible basis for such an investigation and had not explained how each requested document was necessary and essential for those purposes. Plaintiff responded with a revised demand letter, which recited the January 2012 amendment to the Wayzata term loan and the Company’s decision not to refinance the loan. Rather than accept the Company’s offer to allow plaintiff to review a limited set of books and records, plaintiff filed suit in the Court of Chancery to compel the production of those documents demanded by plaintiff. At trial, plaintiff agreed to sign an appropriate confidentiality agreement if granted access to the Company’s books and records and indicated its willingness to work with Key Plastics to tailor the specific books and records to be provided. Thus, the Court’s opinion focuses on whether plaintiff’s stated purposes were proper and, if so, whether the Company had demonstrated that they were only pretenses.
In order to obtain relief under Section 220, a stockholder must demonstrate a proper purpose by a preponderance of the evidence. A proper purpose is one which is “reasonably related” to the holder’s “interest as a stockholder.” When that purpose is the investigation of mismanagement, the plaintiff must also provide evidence from which a credible basis may be found to infer mismanagement. Here, the Court held that plaintiff’s desire to value its stock was a proper purpose. Because of plaintiff’s demonstrated interest in selling its holdings, the Court also held that plaintiff had shown that valuing its interest was a primary purpose.
Once the Court found a proper primary purpose had been established, the Court then examined whether the alleged secondary purposes were the primary purposes and the stated primary purpose was false. The Court held that plaintiff’s other purpose to investigate waste and mismanagement was also a proper purpose. In doing so, the Court found that plaintiff had presented evidence supporting a credible basis for its concern about the amended Wayzata term loan by referencing the increased interest rate and evidence of comparable transactions with lower interest rates. The Company argued, however, that the interest rate was fair given its status as a private company that recently emerged from bankruptcy. The Court acknowledged that might be the case, but rebuked the Company’s attempt to engage in a merits defense, noting that plaintiff need not prove actual wrongdoing in order to establish a credible basis.
At trial, the Company contended that plaintiff had all of the information necessary to investigate allegations of mismanagement and therefore, the Court should deny plaintiff’s demand under Highland Select Equity Fund, L.P. v. Motient Corp., 906 A.2d 156 (Del. Ch. 2006), aff’d sub nom., 922 A.2d 415 (Del. 2007). The Court distinguished Highland Select, which took place in the context of a proxy contest, because that case involved an abuse of the Section 220 process. Here, however, the Court found plaintiff’s primary motives were valid and supported by appropriate evidence that did not “verge on being ruses.” In addition, even if plaintiff possessed certain information about the Wayzata term loan, that information was not necessarily complete. As a result, the Court granted plaintiff relief under Section 220 to utilize the “tools at hand” to further investigate alleged wrongdoing.