Section 220 of the Delaware General Corporation Law, the right to demand an inspection of books and records, has a long and robust jurisprudence that has been the foundation for countless shareholder derivative suits. In Wilkinson v. A. Schulman, Inc., Vice Chancellor Travis Laster laid down what may be a new hoop for plaintiff shareholders to jump through before they can inspect companies’ books and records. Jack Wilkinson (“Wilkinson”), a shareholder of A. Schulman, Inc. (“Schulman”), unhappy with the negative financial results that the company had announced, decided to retain counsel to pursue a books and records inspection. Wilkinson sought the counsel of Levi & Korsinsky LLP (L & K), a New York law firm, with whom he had a previous relationship with, having served as a nominal plaintiff in seven other lawsuits that the firm filed in the past. The demand letter on behalf of Wilkinson to Schulman stated four purposes for inspection: to investigate wrongdoing by the board of directors (“Board”), to demand a derivative suit, to take appropriate action in the event of a director’s breach of their fiduciary duties, and to discuss Board mismanagement and prevention of future wrongdoing. Further, the demand stated that the accelerated vesting of 111,365 shares of restricted stock to CEO Joseph Gingo was a “performance award under the terms of a stockholder-approved equity compensation plan,” and that “accelerating the vesting of the shares based on the fact of Gingo’s retirement violated the requirements for performance awards under the plan.”
Schulman rejected Wilkinson’ s initial demand letter, as well as the follow-up demand letter. Subsequently, Wilkinson filed suit that led to a deposition which ruined any chance he might have had to procure Schulman’s records. Based on Wilkinson’s testimony, it was made clear that the purposes for inspection of Schulman’s books and records belonged to L & K and not Wilkinson himself. The Vice Chancellor determined that the extent of Wilkinson’s involvement in the demand and subsequent action was merely lending his name and signature. Wilkinson testified that he was unhappy with the company’s performance, but had no knowledge of any alleged wrongdoing by the Board or the Chief Executive Officer. Wilkinson was not involved in the drafting of the demand, the complaint, or the responses to interrogatories that were served and he did not confirm that the documents were accurate. Wilkinson simply verified his counsel’s work and signed off on it, he even testified that the purposes in the demand were created by his counsel.
Wilkinson and L&K’s downfall was their non-compliance with a critical element of Section 220, the “proper purpose” clause:
Any stockholder, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during usual hours of business to inspect for any proper purpose, and to make copies and extracts from: (1) The corporation’s stock ledger, a list of its stockholders, and its other books and records….
Elaborating further, a proper purpose for inspection of books and records must be reasonably related to the stockholder’s interest as a stockholder. In Wilkinson’s case, his unhappiness with the financial performance of the company, was not enough of a basis to bring a 220 demand, which is where his counsel came in. L & K came up with Wilkinson’s “proper purpose” for inspection of Schulman’s books and records since Wilkinson’s original purpose did not qualify for inspection under Section 220. Wilkinson knew that he needed an attorney in order to inspect the books and records and Section 220 states that the shareholder can make his demand through an attorney, but how involved must a shareholder be in the process once he seeks representation?
Vice Chancellor Laster made a key distinction in his opinion that,
[A] stockholder seeking an inspection and retaining counsel to carry out the stockholder’s wishes is fundamentally different than having an entrepreneurial law firm initiate the process, draft a demand to investigate different issues than what motivated the stockholder to respond to the law firm’s solicitation, and then pursue the inspection and litigate with only minor and non-substantive involvement from ostensible stockholder principal.
Now that this clarification has been given to plaintiff shareholder attorneys going forward, the fundamental question is how do attorneys deal with shareholder clients who demand inspection with a basic purpose such as unhappiness with financial performance? Shareholder plaintiffs are not typically so well versed in the law to know that they must have a “proper purpose” in order to inspect books and records. In other words, a shareholder’s likely thought is that they have invested their hard-earned money into the company and any purpose they have to inspect the books and records would constitute a proper purpose. The importance of Vice Chancellor Laster’s opinion in Wilkinson v. A. Schulman, Inc. is that the requirement of a proper purpose, although complex, has been and continues to be thoroughly fleshed out by Delaware jurisprudence and cannot be falsely concocted by plaintiff’s counsel.
Moving forward after Wilkinson v. A. Schulman, Inc., plaintiff shareholder’s counsel must be frank with their clients to determine if they have a legitimate basis to bring a 220 action and the plaintiff should be as involved in the process as possible. At the very least, the plaintiff shareholder should be able to review documentation before it is filed with the court or sent to opposing counsel. If Wilkinson himself was more than just a name and a signature, such as if he would have been involved in the drafting of the demand, the complaint, given his own responses to interrogatories, and reviewed each document for accuracy, Vice Chancellor Laster might have given Wilkinson, and L&K, what they sought.
Amanda is a 3L student at Delaware Law School and a staff member on the Delaware Journal of Corporate Law.
Suggested Citation: Amanda Fedak, Plaintiff’s Counsel Learned a Lesson, Del. J. Corp. L. (Jan. 17, 2018), www.djcl.org/blog.