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Wilkinson v. A. Schulman, Inc., C.A. No. 2017-0138-JTL (Nov. 13, 2017) (Laster, V.C.)

November 13, 2017

In this post-trial opinion, the Court of Chancery held that a stockholder was not entitled to inspect a corporation’s books and records because he had failed to demonstrate a proper purpose under Section 220.  The Court found that the stockholder’s stated purposes were not his actual purposes, but rather his counsel’s purposes.

Counsel for purported stockholder Jack Wilkinson (“Plaintiff”) sent a books and records demand letter to A. Schulman, Inc. (the “Company”) regarding the Company’s decision to grant additional compensation to its departing CEO.  The demand letter alleged that, in granting additional compensation, the Company’s directors had violated the CEO’s employment agreement and a stockholder-approved equity compensation plan.  The demand letter sought books and records for the stated purpose of investigating the Board’s decision to determine whether wrongdoing had occurred.  The Company rejected the demand letter in its entirety, arguing that Plaintiff had not provided credible evidence of wrongdoing and the requested information was not necessary and essential to the stated purposes.

After Plaintiff brought suit to compel inspection, the parties engaged in discovery and submitted the case on a stipulated paper record.  At trial, the Company argued that discovery had shown that the purposes stated in the demand letter were not Plaintiff’s actual purposes.  Based on the trial record, the Court agreed, finding that Plaintiff had “simply lent his name to a lawyer-driven effort by entrepreneurial plaintiffs’ counsel.”  In reaching its decision, the Court relied on Plaintiff’s deposition testimony, in which Plaintiff admitted he played no role in drafting the stated purposes or the categories of books and records identified in the demand letter.  The Court also found that, after signing the demand letter, Plaintiff did not review subsequent correspondence between his counsel and the Company, took no steps to verify the accuracy of the complaint, did not review the Company’s answer to the complaint, and made no attempt to verify the accuracy of his interrogatory responses.  The Court likewise found that the event prompting Plaintiff to seek books and records—the announcement of negative financial results—differed substantially from what his attorneys chose to explore—the Board’s decision to grant additional compensation.  Lastly, the Court noted that the same law firm representing Plaintiff in connection with the demand letter had previously represented Plaintiff in at least seven other lawsuits, and that Plaintiff did nothing to verify the factual allegations in those cases, aside from reading the lawyer-drafted complaints.

The Court concluded its opinion by reaffirming the notion that stockholders can use counsel to seek books and records.  The Court, however, contrasted situations in which lawyers carry out the stockholder’s wishes with situations in which lawyers independently drive the effort.  Finding that the Company proved that Plaintiff’s stated purposes were not his actual purposes, the Court held that Plaintiff lacked a proper purpose and was not entitled to inspect any documents.  Accordingly, the Court entered judgment in favor of the Company.

The full opinion is available here