Books and Records – Page 4

Delaware Chancery Court Addresses Alleged Breaches of LLC Agreement

Jul 14 2015

NewYork.com Internet Holdings, Inc. v. Entertainment Benefits Group, LLC, et al., involves a dispute between the two owners, each with a 50% interest, of NewYork.com Entertainment Group, LLC (“NYEG” or the “Company”). The plaintiff alleged that the Company’s board (the “Board”) was deadlocked because it had been excluded from all decision-making and sought dissolution, and the defendant counterclaimed for various breaches by the plaintiff of the Company’s operating agreement; the plaintiff then moved to strike the defendant’s counterclaim or dismiss it in its entirety. In this opinion, the court granted in part and denied in part the plaintiff’s motion to strike, and denied in its entirety the plaintiff’s motion to dismiss.

The plaintiff and defendant in this case were the two owners of NYEG. The principals of the plaintiff, NewYork.com Internet Holdings, Inc. (“NYIH”), were the original registrants of the domain name NewYork.com, a website that sells and markets travel and entertainment tickets in New York. The defendant, Entertainment Benefits Group, LLC (“EBG”), is in the business of selling and marketing travel and entertainment tickets.

Chancery Court Blocks Stockholders’ Push for Search of Non-Employee Directors’ Personal Email Accounts, But Orders Production of Certain Documents Withheld as Privileged, in Books and Records Action under DGCL Section 220

May 06 2015

By Whitney Smith and Lauren Garraux

In an April 30, 2015 Memorandum Opinion, Vice Chancellor Parsons denied in part and granted in part a motion by two lululemon athletica, inc. (“lululemon” or the “Company”) stockholders to enforce a prior court order directing the Company to produce books and records relating to an investigation of potential insider trading or Brophy claims against the Company’s founder and then-chairman of the board of directors, and potential claims for mismanagement against the other directors. In doing so, the Court held that requiring the Company to search its non-employee directors’ personal email accounts for responsive documents was unwarranted, but determined that certain documents withheld as privileged should be produced pursuant to the fiduciary exception to the attorney-client privilege.

In May and October 2013, respectively, lululemon stockholders Hallandale Beach Police Officers and Firefighters’ Personnel Retirement Fund and Laborers’ District Council Construction Industry Pension Fund (collectively, “Plaintiffs”) commenced separate actions under Delaware General Corporation Law (“DGCL”) Section 220, seeking documents relating to trades of Company stock involving Dennis Wilson, lululemon’s founder and then-chairman of its board in June of 2013. In particular, the timing of the trades — which were made within days of lululemon’s then-CEO’s announcement both to Wilson and the Company’s board that she planned to resign — raised questions, even prompting the Wall Street Journal (“WSJ”) to email the Company for confirmation of certain facts for a story regarding Wilson’s trades for an article which noted their favorable timing for Wilson.

Chancery Court Holds That a Proper Purpose with a Credible Basis to Investigate is Required to Grant a Section 220 Action in Pursuit of a Future Derivative Litigation

Apr 20 2015

By Meghan Wotherspoon and Calvin Kennedy

The Chancery Court held that a stockholder must show that there is a proper purpose with a credible basis in order to succeed in a Section 220 action to inspect the books and records of a corporation.

In Southeastern Pennsylvania Transportation Authority v. AbbVie Inc. and James Rizzolo v. AbbVie Inc., the plaintiffs, Southeastern Pennsylvania Transportation Authority (“SEPTA”) and James Rizzolo (“Rizzolo”), as shareholders of defendant AbbVie Inc. (“AbbVie”), made individual written demands on AbbVie for inspection of certain books and records pursuant to Section 220 of the Delaware General Corporation Law (“DGCL”). The plaintiffs sought to obtain records to demonstrate that AbbVie’s directors breached their fiduciary duties. AbbVie rejected the demands for failure to state a proper purpose and each plaintiff then filed a Section 220 Complaint. As the actions stemmed from the same event, the Court utilized a single Memorandum Opinion to deliver its decisions.

Stating That an Inspection under DGCL Section 220 Is Not “Merely For The Curious,” The Chancery Court Reaffirms The Need for a Stockholder to Show a Proper Purpose for a Section 220 Demand and, in Doing So, Holds That a Derivative Suit That is Dismissed With Prejudice is Collateral Estoppel as to All Stockholders

Mar 11 2015

By David Bernstein and Lauren Garraux

Vice Chancellor Noble denied the demand of plaintiff Fuchs Family Trust to inspect the books and records of defendant Parker Drilling Company under Section 220 of the Delaware General Corporation Law and, in doing so, held that Fuchs’s ability to institute future stockholder derivative litigation — one of the stated purposes underlying its demand — was barred by collateral estoppel based on the dismissal with prejudice of a prior stockholder derivative lawsuit — to which Fuchs was not a party — on procedural grounds.

Valuing Stock in a Delisted Corporation Is a Proper Purpose for a Books and Records Request Under DGCL §220; Evaluating Risk in That Company Is Not

Mar 04 2015

By David Bernstein and B. Ashby Hardesty, Jr.

A Post-Trial Master’s Report ruled that conducting a risk evaluation regarding a company was not a proper purpose for a Section 220 books and records demand, but that valuing the company was.

On February 26, 2015, Master LeGrow issued her Final Report in Southpaw Credit Opportunity Master Fund LP v. Advanced Battery Technologies, Inc., C.A. No. 9542-ML (Del. Ch. February 26, 2015), recommending that the Court order Advanced Battery Technologies, Inc. (“ABAT”) to produce certain books and records for inspection under Section 220 of the Delaware General Corporation Law, subject to a standard confidentiality agreement.

DGCL §220 Books and Records Request Improper as Stockholder Demonstrates Proper Purpose but is Unable to Show Loss or Harm to Corporation

Feb 17 2015

By Porter Sesnon and Kristy Harlan

A Final Master’s Report recommended that the Chancery Court deny a plaintiff’s motion for summary judgment and grant the defendant’s cross-motion for summary judgment, relating to plaintiff’s demand to inspect a Delaware corporation’s books and records to investigate possible mismanagement, waste and breaches of fiduciary duty.

In October 2012, the plaintiff, Mr. Walther, made a demand to inspect the books and records of ITT Educational Services, Inc. (“ITT”) under Section 220 of the Delaware General Corporation Law (“DGCL”). The Section 220 request stemmed from ITT’s public disclosures and a Majority Committee Staff Report (“Committee Report”) issued by the U.S. Senate Health, Education, Labor and Pensions Committee relating to ITT’s compliance with federal Title IV student loan eligibility requirements and its student loan default rates.

DGCL §220 Does Not Limit Court’s Ability to Restrict Shareholder Inspection Rights

Jan 07 2015

By Eric Freedman and Eric Taylor

In an en banc decision, the Delaware Supreme Court reversed a decision of the Delaware Court of Chancery holding that the court lacked the authority to impose a specific restriction on a shareholder’s inspection of a corporation’s books and records under section 220(c) of the Delaware General Corporation Law (the “DGCL”). United Technologies Corp. (“UnitedTechnologies”) had sought to restrict the use of information obtained in an inspection of the company’s books and recordsby its shareholder Lawrence Treppel (“Treppel”). Specifically, United Technologies asked Treppel to sign a confidentiality agreement that would require Treppel to bring any legal action “arising out of” the inspection in a Delaware court. Treppel refused to sign the agreement and filed a section 220 action seeking access to United Technologies’ books and records without any such restriction. United Technologies challenged whether Treppel had a “proper purpose” for the information request (as required by section 220(b) of the DGCL), but also asked the Court of Chancery to use its legal authority under section 220(c) to limit the use of information gained from Treppel’s books and records inspection to action in a Delaware court. Section 220(c) grants the court the discretion to “prescribe any limitations or conditions with respect to [an] inspection,” or award such further relief as the court deems proper.

Oklahoma Firefighters Pension & Retirement System v. Citigroup Inc., C.A. No. 9587-ML (Sept. 30, 2014) (LeGrow, A., M.C.)

Oct 07 2014

By Annette Becker and Caitlin Howe

This final report stems from plaintiff-shareholder Oklahoma Firefighters Pension & Retirement System’s (“Oklahoma Firefighters” or “Plaintiff”) demand under 8 Del. C. §220 for access to defendant Citigroup Inc.’s (“Citigroup” or “Defendant”) books and records in connection with alleged fraud and money laundering at two Citigroup subsidiaries. Following a paper record trial in June 2014, the court concluded in its draft report that Plaintiff had a proper purpose in seeking access to the books and records, but the court narrowed the scope of Plaintiff’s initial request. At the present phase of the case, Citigroup objects to the conclusions reached in the draft report, arguing that the incidents at the subsidiaries do not give Plaintiff a credible basis from which to infer wrongdoing or mismanagement on the part of the Citigroup Board of Directors. Moreover, Citigroup contends that even if Plaintiff’s purpose were proper, the scope of the documents requested is still too broad.

The demand arises from incidents at Banco Nacional de Mexico, S.A. (“Banamex”) and Banamex USA, which together account for 10% of the global profits of Citigroup. At Banamex, a fraudulent accounts receivables finance arrangement was discovered, which caused Citigroup to adjust downward its 2013 fourth quarter and full year financials by $235 million. Investigations into the fraud indicated that Citigroup may not have had the proper internal controls in place to prevent fraud, and Moody’s subsequently downgraded Banamex’s debt and deposit ratings due to the allegations surrounding the bank. Another smaller fraud of $30 million was also uncovered at Banamex. At Banamex USA, grand jury subpoenas were issued by the United States District Attorney for the District of Massachusetts regarding compliance with Bank Secrecy Act (“BSA”) and Anti-Money Laundering (“AML”) regulations. The grand jury subpoenas were issued subsequent to a number of consent orders between Citigroup and various financial regulatory agencies regarding insufficient BSA and AML controls, risk management, the flow of drug cartel-related funds, and general oversight. In response to the BSA and AML concerns, the Citigroup Board of Directors charged the Board’s Audit Committee with responsibility for legal compliance oversight.

Caspian Select Credit Master Fund Ltd. v. Key Plastics Corporation, C.A. No. 8625-VCN (Noble, V.C.)

Feb 27 2014

By Nick Froio

In this opinion, Vice Chancellor Noble considered a dispute involving a minority investor, Caspian Select Credit Master Fund Ltd. (“Caspian”), in a closely-held portfolio company, Key Plastics Corporation (“Key Plastics”), seeking to obtain certain books and records of Key Plastics pursuant to 8 Del. Code § 220. The Court found in favor of Caspian, holding that Caspian had stated proper purposes under Section 220, and that Key Plastics failed to demonstrate that those purposes were false or a pretense.

In initiating this Section 220 action, Caspian argued that the proper purposes for its books and records requests were to investigate the value of its interest and the potential waste, mismanagement, self-dealing, and other improper transactions related to a loan transaction between Key Plastics and an affiliate of Key Plastics’ controlling stockholders (the “Affiliated Loan”). Key Plastics argued that Caspian’s alleged purposes were not its primary motive and that they were a false pretense: Caspian already had the information needed to investigate any potential wrongdoing and was litigating solely to pressure the controlling stockholders to purchase its interest.

Catagory:Books and Records