Wolst v. Monster Beverage Corp., C.A. No. 9154-VCN (Del. Ch. Oct. 3, 2014) (Noble, V.C.)
In this letter opinion, the Court of Chancery entered judgment against a stockholder seeking books and records related to the denial of her demand that Monster Beverage Corporation bring litigation related to alleged insider trading. While noting that the question was “not free of doubt,” the Court declined to extend the rationale of American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974)—which provides that the filing of a class action tolls the running of the statute of limitations for the direct claims of potential class members—to derivative claims.
In September 2008, Monster stockholders filed a federal securities class action alleging insider trading at Monster during 2006 and 2007. The parties to that action entered into a settlement agreement in April 2014. In October 2008, other stockholders brought a derivative action related to the same alleged trading activities. That action was dismissed because the plaintiffs could not establish demand futility.
In February 2012, plaintiff Anastasia Wolst made a demand of Monster’s board to bring litigation related to the same alleged insider trading. In March 2013, Wolst made a demand under 8 Del. C. § 220for books and records to evaluate the board’s refusal to act on her litigation demand. Wolst’s sole purpose in seeking books and records was to pursue a derivative action based on the alleged insider trading.
The Court held that Wolst did not have a proper purpose for seeking books and records because her anticipated derivative claims were barred by laches. The Court acknowledged that a viable time-bar defense to an anticipated derivative claim does not necessarily defeat a request for books and records. The Court nevertheless concluded that Wolst’s effort failed in this “specific factual setting” because she had not identified more recent conduct to which the prior alleged misconduct could be relevant or elaborated on what she would do with the requested books and records other than attempt to pursue a time-barred derivative action.
Referencing the analogous three-year statute of limitations, the Court held that Wolst’s seven-year delay was unreasonable, particularly because Wolst had constructive knowledge of the events by late 2007 and participated in the prior derivative action. The Court found this delay “presumptively prejudicial” to Monster because of fading memories and the “protracted distractions” diverting management’s attention.
Finally, the Court held that the pendency of the federal class action did not provide a basis for tolling the period for evaluating the laches defense. Under American Pipe, a class action tolls the running of the limitations period for the direct claims of potential class members. Wolst, however, was not a member of the class in the federal action, and the Court declined to extend the rationale of American Pipe to derivative claims. The Court noted the practice of staying a derivative action brought to recover a corporation’s losses pending resolution of the underlying securities litigation, but found that such “prudent case management” did not mean that American Pipe should be extended to unasserted derivative claims.