Thursday, March 02, 2017

Squeezed-out shareholder lost standing to sue for books and records

By Anne Sherry, J.D.

In a case of first impression, the Delaware Court of Chancery held that Section 220 of the Delaware General Corporation Law only allows plaintiffs to sue for books and records if they are still shareholders at the time of suit. The plaintiff was a shareholder of Monster Worldwide when he made his Section 220 inspection demand, but got squeezed out in a merger before filing a complaint (Weingarten v. Monster Worldwide, Inc., February 27, 2017, Glasscock, S.).

A few months after Monster entered into a merger agreement with Randstad Holding nv and its subsidiary, and about two weeks before the transaction closed, the plaintiff sent an inspection demand to Monster’s board. While the parties were negotiating the scope of the inspection, the plaintiff said that he would abstain from filing a complaint but asked Monster to notify him by a certain deadline if it would not waive a standing argument should the merger close before a complaint was filed.

Monster did not respond to that email by the deadline, but the plaintiff did not file a complaint. On the Friday before the merger, Monster told the plaintiff that it would not give up any defense should a complaint be filed. The plaintiff filed a complaint to compel inspection a few weeks after closing.

The chancery court granted Monster’s motion to dismiss based on the plaintiff’s lack of standing, holding that Section 220 requires that a plaintiff own stock at the time the complaint is filed. The statute requires a plaintiff to establish that he “is a stockholder” and “has complied” with the presuit demand requirement. This language is plain and ambiguous: it requires both past-tense compliance with the demand requirement and present-tense ownership of shares.

The court also rejected the plaintiff’s argument that Monster should be estopped from challenging standing because it did not respond to the plaintiff’s waiver request in time for him to file a complaint. Equitable estoppel requires some conduct on which the misled party reasonably relied. Here, there was no “conduct” by Monster, and to the extent the plaintiff relied on Monster’s silence, that reliance was not reasonable.

The case is No. 12931-VCG.

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