Shareholder’s Squeeze-Out Stymies Standing for Search Suit

By: Joshua Gelman, Esq.

Most jurisdictions provide individuals the right to request the books and records of the corporation where that individual is a shareholder. Sometimes, corporations and their shareholders cooperate to satisfy such requests informally. Sometimes, where conflicts exist between a shareholder and the corporation or its officers, directors or other shareholders, such requests can be very adversarial and can lead to contentious litigation. In Delaware, such requests and the mechanism for disputes related to them are governed by Section 220 of the Delaware General Corporation Law. Del Code Ann. tit. 8, § 220 (2006).[1] (a “Section 220 Demand”).

In Weingarten v. Monster Worldwide, Inc., Del. Ch., C.A. No. 12931, Glasscock, V.C. (Feb. 27, 2017), the Chancery Court was faced with a case of first impression. The Vice Chancellor had to decide what happens where a shareholder makes a proper Section 220 Demand but the corporation squeezes out the shareholder’s shares through termination by merger prior to the initiation of litigation to enforce that demand.

In Weingarten, the corporation agreed to a merger whereby the acquiring company would purchase all of the corporation’s outstanding stock for a set cash price. About ten weeks after the merger agreement was entered (but before the completion of that merger), a shareholder of the corporation sent a Section 220 Demand Letter to “‘determine whether it is appropriate to pursue litigation against all or some members of the Board’ for alleged wrongdoing in connection with the Merger.” Weingarten at p. 4. Within a week, the corporation rejected the Section 220 Demand but expressed a willingness to respond to a more narrow production. The shareholder stated that he would abstain from filing a complaint while he negotiated the request with the corporation, and stated that he expected the corporation would refrain from claiming that the shareholder lost standing to make his Section 220 Demand should the merger be complete before the issue resolved. The shareholder further requested that the corporation agree, by the following day, to refrain from challenging standing. The corporation responded days later that it would not agree to refrain from making any challenge to the shareholder’s standing. Days later, the merger was completed and the corporation informed the shareholder that it deemed his Section 220 Demand to be moot.

Less than a month after the merger, the shareholder filed a verified complaint against the corporation under Section 220. The corporation sought to dismiss the complaint because the shareholder had ceased to be a shareholder after the merger, when his shares were purchased. The shareholder argued that the corporation was estopped from asserting such a defense because of its representation that it would negotiate the Section 220 Demand. The court found that the shareholder’s reliance on that representation was not reasonable because the shareholder waited until after the merger to file the complaint. The court further ruled that, because the plaintiff was longer a shareholder as of the time he filed the complaint, because of the merger, the plaintiff lacked standing to bring a Section 220 action and the complaint was dismissed.

Weingarten demonstrates that a shareholder sits on his rights at his peril where those rights may be extinguished by a merger. As such, it may not be enough to rely upon the appearance of a dialogue towards resolution. A shareholder may instead consider preserving those rights through a court filing or at least obtaining a written agreement to protect shareholder rights before refraining from making a court filing. It is times like this that being defensive may require being aggressive.

[1] For limited liability companies, see Del Code Ann. tit. 6, § 18-305 (2012).

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