Woods v. Sahara Enters., Inc., C.A. No. 2020-0153-JTL (Del. Ch. July 22, 2020) (Laster, V.C.)
In this memorandum opinion, the Delaware Court of Chancery held that a stockholder seeking books and records under Section 220 of the Delaware General Corporation Law was entitled to inspect certain formal board documents to value her shares and investigate possible mismanagement due to a lack of oversight. Additionally, the Court held that the company could not deny plaintiff’s request on the grounds that a prior corporate reorganization prevented it from accessing the books and records plaintiff sought.
Plaintiff owned shares in Defendant Sahara Enterprises, Inc. (“Sahara”), a Delaware holding company that held a 99% share in an investment company, Sahara Investments LLC (“Sahara Investments”). The remaining 1% interest of Sahara Investments was held by SMCO, a “sister company” of Sahara that was formed as part of Sahara’s corporate reorganization; SMCO served as the managing member of Sahara Investments. From time to time Sahara provided its stockholders with an annual report that included audited financial statements for both Sahara and SMCO on a consolidated basis.
Plaintiff became concerned about Sahara’s investment strategy, which had consistently produced worse results than broad index funds, and sought books and records under Section 220. Plaintiff noted that the annual report provided by Sahara did not include information about its investment strategies, director and officer compensation, or related-party transactions, leaving stockholders in the dark as to the reasons for Sahara’s underwhelming performance. Following plaintiff’s books and record demand, Sahara agreed to provide only limited categories of information. Plaintiff subsequently filed this litigation.
First, the Court examined whether plaintiff had a proper purpose for seeking inspection of Sahara’s books and records. The Court held that plaintiff’s stated purpose of seeking to value her shares was proper because Sahara is a privately held company and its value is not easily ascertained. The Court rejected Sahara’s argument that plaintiff needed to demonstrate why she needed to value her shares, noting that Delaware law does not require that a stockholder establish both a purpose for seeking an inspection and an end to which the fruits of the inspection will be put. Next, the Court held that plaintiff had a proper purpose in seeking to investigate possible corporate wrongdoing because she had presented a credible basis from which the Court could infer possible mismanagement. The Court noted that during the litigation, Sahara asserted an affirmative defense that SMCO held the records plaintiff sought and that Sahara was merely a holding company that lacked the authority to obtain these records. This defense, the Court reasoned, gave the plaintiff two bases to suspect wrongdoing because it conflicted with Sahara’s representation to its stockholders that its reorganization into SMCO would not have an effect on the stockholders’ ability to obtain information. Further, this defense created a credible basis to suspect that Sahara’s directors had abdicated their statutory responsibilities - if Sahara relied on SMCO to manage its assets, it should have had documents demonstrating how it monitored SMCO.
Regarding the scope of plaintiff’s inspection, the Court held that plaintiff was entitled to formal materials provided to Sahara’s board of directors and those evidencing the board’s deliberations, such as minutes of board meetings. Plaintiff was only entitled to those formal board materials that were sufficiently targeted to her purposes, and was not entitled to receive informal board materials, like communications between board members, or officer-level materials. But, the Court noted that if plaintiff found that formal board materials were inadequate for her purposes, she was entitled to renew her request for informal board materials and officer materials.
Finally, the Court directed Sahara to produce documents for the past five years and addressed which entities would be required to provide books and records in response to plaintiff’s request. The Court noted that while Sahara and SMCO were technically separate entities, Sahara had previously represented to its stockholders that its reorganization into SMCO would not cause any change in the information available to stockholders. Further, the Court stated that the two entities shared employees who could equally access the books and records of both companies, and thus both entities would be compelled to produce books and records in response to plaintiff’s request.