CLIENT ALERT: Wilkinson v. A. Schulman, Inc.: Court of Chancery Denies Section 220 Inspection Demand That Was “Lawyer-Driven Effort”
On November 13, 2017, the Court of Chancery issued a post-trial opinion rejecting a stockholder’s demand to inspect a corporation’s books and records. Concluding that the corporation, represented by Potter Anderson, had demonstrated that the stockholder’s stated purposes were not his actual purposes, but those of his counsel, the Court held that the stockholder had failed to demonstrate a proper purpose under Section 220.
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. 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. After trial, Vice Chancellor J. Travis Laster found 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 admission that 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 Plaintiff did not review correspondence between the Company and his counsel or take steps to verify the accuracy of documents filed on his behalf. 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 Plaintiff had been represented by the same law firm in at least seven other lawsuits, and in each case had played no substantive role.
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.
Delaware courts have long recognized that entrepreneurial plaintiffs’ firms play an important role in defending and enforcing the rights of stockholders in Delaware corporations. This case, however, serves as a reminder that Delaware courts remain concerned that the interests of stockholders may often diverge from the interests of their counsel and will take steps to curb perceived abuses. It also confirms that, when responding to a books and records demand, a well-advised company will consider the litigation history of the demanding stockholder, the relationship between the demanding stockholder and her counsel, and any efforts by counsel to recruit a stockholder to pursue the demand.