KT4 Partners LLC v. Palantir Technologies, Inc., C.A. No. 2017-0177-JRS (Del. Ch. Feb. 22, 2018) (Slights, V.C.)
In this post-trial memorandum opinion, the Court of Chancery granted Plaintiff KT4 Partners LLC (“KT4”) the right to inspect certain books and records of Defendant Palantir Technologies, Inc. (“Palantir”) pursuant to Section 220 of the General Corporation Law of the State of Delaware.
KT4 is an investment vehicle through which Marc Abramowitz invested in Palantir as early as 2003. Abramowitz enjoyed a close relationship with Palantir executives until he was accused of misappropriating Palantir trade secrets in 2016. When the relationship deteriorated, KT4 tried to sell its shares in Palantir to Brooklands Capital Strategies (“Brooklands”). Before that sale could be completed Palantir learned of the transaction and preempted it by selling newly issued shares to Brooklands. KT4 sought to investigate a tortious interference claim against Palantir and demanded books and records from Palantir under an Investors’ Rights Agreement (“IRA”) and Section 220 “to investigate fraud, mismanagement, abuse, and breach of fiduciary duty” by Palantir officers, directors, and stockholders. Palantir refused to permit the inspection, which prompted KT4 to file suit.
KT4 advanced two purposes for its inspection demand: (i) valuing its shares, and (ii) investigating wrongdoing.
First, the Court rejected KT4’s valuation purpose. While valuing stock is a proper purpose for an inspection demand under Delaware law, KT4 failed to expressly state that purpose in its initial demand. KT4 argued that while its demand did not expressly articulate that purpose, it implicitly did so by requesting year-end financial statements, quarterly financial statements, and valuations. KT4 also argued that any doubt about the wording of the demand should be resolved in favor of its statutory inspection rights, and that the technical deficiency was cured when it stated its valuation purpose in its complaint. The Court found that Section 220 unambiguously requires a stockholder to set forth their inspection purpose “in proper form before the litigation is initiated.” (emphasis omitted). As a result, the Court held that KT4’s failure to expressly state its valuation purpose in its initial demand was grounds to deny its inspection demand.
Second, the Court found that KT4 had partially stated a proper purpose by seeking to investigate fraud, mismanagement, abuse, and breaches of fiduciary duty. KT4 set forth the following seven allegations of wrongdoing it sought to investigate: (i) failure to hold annual stockholder meetings; (ii) adoption of certain IRA amendments; (iii) violation of a First Refusal and Co-Sale Agreement and the IRA; (iv) potential waste in connection with its compensation of an investor; (v) wrongful interference with the Brooklands transaction; (vi) failure to return liquidity to stockholders; and (vii) excessive CEO compensation. The Court found that KT4 had stated a credible basis to suspect wrongdoing for allegations (i) – (iii), but did not put forth evidence to meet the credible basis standard for allegations (iv) – (vii). With respect to the latter allegations, the Court found that they were either personal in nature to Abramowitz or based on speculation or conjecture insufficient to meet the credible basis standard. The Court thus limited the scope of KT4’s inspection rights to allegations (i) – (iii).