Mudrick Capital Mgmt., L.P. v. Globalstar, Inc., C.A. No. 2018-0351-TMR (July 30, 2018) (Montgomery-Reeves, V.C.)
In this post-trial decision, the Court of Chancery clarified the scope of documents subject to production when a stockholder issues a demand to inspect the corporation’s books and records to investigate a pending transaction. Specifically, the Court allowed the stockholder to obtain emails with key individuals during the period surrounding the transaction, as well as valuation information concerning an asset for which the company allegedly had overpaid. The Court, however, declined to order production of draft board minutes and other draft materials based solely on an unsupported allegation that the final versions of those materials were “sanitized” compared to the drafts.
The dispute arose from a decision by the board of Globalstar, Inc. (“Globalstar”) to pursue the purchase of Thermo Acquisitions, Inc. (“Thermo”), an entity controlled by Globalstar’s CEO and controlling stockholder, James Monroe (“Monroe”). Leading up to the acquisition, Globalstar had been experiencing liquidity problems. To alleviate Globalstar’s liquidity issues, the plaintiff, Mudrick Capital Management, L.P. (“Mudrick”), offered Globalstar a loan to provide sufficient liquidity through the end of 2019. Globalstar’s board did not respond, and instead consummated the transaction with Thermo, which provided Globalstar cash and several other assets.
The transaction had the effect of increasing significantly the percentage of Monroe’s ownership of Globalstar and diluting Globalstar’s other stockholders. In addition, a contemporaneous investment research report suggested that Globalstar paid substantially more for one of the assets, a company called FiberLight LLC (“FiberLight”), than the asset was truly worth. Concerned about the interested nature of the transaction, Mudrick issued a demand to inspect Globalstar’s books and records pursuant to 8 Del. C. § 220. After an exchange of letters, Mudrick filed suit to compel production of the documents it had demanded to inspect.
During the litigation, the parties stipulated that Mudrick had standing to seek inspection of Globalstar’s books and records and that Mudrick had stated proper purposes for inspection. Accordingly, the remaining issues pertained to the extent of documents that were subject to inspection. As of trial, three categories of documents remained outstanding: (1) emails during the period surrounding the transaction involving Monroe, Globalstar’s general counsel, and two members of the special committee formed to evaluate the Thermo transaction; (2) valuation materials concerning FiberLight; and (3) draft minutes for board and committee meetings during the period surrounding the transaction, as well as drafts of the merger agreement, term sheets, and letter of intent.
The Court first ruled that Mudrick was entitled to Globalstar emails from the relevant time period. While acknowledging that a stockholder may obtain only documents “necessary” to a proper purpose stated in its demand, the Court explained that the emails were necessary to effectively address the problems identified by Mudrick through litigation or negotiations. The Court then determined to require production of valuation materials concerning FiberLight, noting that the apparent overpayment “provides a credible basis to investigate mismanagement, waste, or wrongdoing,” and that the requested materials were necessary to understand how Globalstar’s special committee reached the valuation it did. Finally, the Court declined to order production of draft board meeting minutes and other materials, finding no support for Mudrick’s assertion that the drafts would be less “sanitized” than the final versions of the documents.
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