Opinion
C.A. No. 16292.
June 18, 1998.
David J. Margules, Esquire Wolf, Block, Schorr Solis-Cohen, LLP Wilmington, DE.
John H. Small, Esquire Prickett, Jones, Elliott, Kristol Schnee Wilmington, DE.
Dear Counsel:
This action was brought by Golden Cycle, LLC, a Pennsylvania limited liability company ("Golden Cycle"), against Global Motorsport Group, Inc., a Delaware corporation ("Global" or the "Corporation"), pursuant to Section 220 of the Delaware General Corporation Law. Trial was held on May 22, 1998 and post-trial briefing was completed on June 4.
The background facts relevant to this action are recited in my Memorandum Opinion of May 20, 1998, denying a motion for preliminary injunction in related litigation. I need only repeat here that Golden Cycle was formed some months ago for the purpose of acquiring Global Motorsport. After purchasing approximately 10 percent of the common stock of the company, it launched an effort to acquire the rest of the Global Motorsport common stock, combining an $18 per share cash tender offer with a consent solicitation to remove the board of directors. In response to Golden Cycle's efforts, Global, on May 22, 1998, announced that it had entered into a letter of intent to sell itself for $23 to a competing party.
On March 25, 1998, at the outset of its quest, Golden Cycle, made a demand on the Corporation, pursuant to Section 220 of the Delaware General Corporation Law ("DGCL") to inspect certain books and records, including stock list materials. This lawsuit followed. By the time of trial, only four categories of documents remained in dispute between the parties:
1. Documents considered or reviewed by [Global's] board of directors in deciding to acquire Chrome Specialties, Inc.;
2. Documents relating to any proposal or offer to acquire or to sell [Global], its stock or more then 50% of the assets of [Global] (determined by value or by revenue production);
3. Documents showing valuations, projections or business plans relating to [Global], its stock or its assets;
4. Documents sufficient to show the adjustments to the year end statements requested by [Global's] auditors.
The March 25, 1998 demand letter described Golden Cycle's purposes as follows:
(a) to evaluate the current direction of the Company and its management;
(b) to ascertain the value of its shares of Company stock; (c) to determine whether to sell its shares of common stock or to acquire additional shares of common stock; and (d) to communicate with other holders of shares of common stock regarding matters relevant to stockholders, including communicating with respect to each of these matters.
Later developments, specifically the commencement of Golden Cycle's tender offer and consent solicitation, have more specifically focused plaintiff's purpose to items (b) and (d).
Petitioner properly points out that stockholders of Delaware corporations are entitled to inspect corporate books and records if (i) the form and manner requirements for making a demand are met, and (ii) the inspection is for a proper purpose which is "reasonably related to such person's interest as a stockholder." 8 Del. C. § 220(c). Proper purpose has been construed to mean that a shareholder's primary purpose must be proper, irrespective of whether any secondary purpose is proper. CM M Group, Inc. v. Carroll, Del. Supr., 453 A.2d 788, 792 (1982); Helmsman Management Serv. v. A S Consult., Del. Ch., 525 A.2d 160, 164 (1987). Additionally, the primary purpose may not be adverse to the corporation's best interests. Thomas Betts Corp. v. Leviton Mfg. Co., Inc., Del. Ch., 685 A.2d 702, 709 (1995); aff'd 681 A.2d 1026 (1996). Because Golden Cycle has satisfied the form and manner requirement, the only issue is whether it has demonstrated a proper purpose.
As the parties recognize, this case is closely analogous to Vice Chancellor Jacob's decision in BBC Acquisition Corp. v. Durr-Fillauer Medical, Inc., Del. Ch., 623 A.2d 85 (1992). Plaintiff in BBC Acquisition was a hostile tender offeror seeking information pursuant to a Section 220 books and records demand in order to value its stock. As is true here, the target company in BBC Acquisition had entered into a higher priced transaction with a third party, and the plaintiff sought information to determine whether or not to raise its bid. In making its determination, the Court focused on two of the plaintiff's asserted purposes: (i) to value its own shares; and (ii) to communicate with other shareholders concerning the plaintiff's tender offer or a "possible solicitation of proxies or consents." In finding that the plaintiff had failed to demonstrate a proper purpose, Vice Chancellor Jacobs found that the plaintiff's primary purpose was not to place a value on its shares. Instead, the Court concluded that its real purpose was to place a value on the company as a whole in order to determine whether to increase its offering price. The Court determined that, as a matter of law, this purpose was not reasonably related to the plaintiff's interest as a shareholder, and therefore was not a proper purpose within the meaning of Section 220.
As in the present action, the plaintiff in BBC Acquisition did not increase its offer in response to the higher bid; rather, it took the position that it needed access to the same information provided the other bidder in order to decide whether to increase its bid.
BBC Acquisition is not readily distinguishable from the present application. Here, plaintiff Golden Cycle was formed only recently, and specifically for the purpose of acquiring Global. Its acquisition of Global stock was made entirely for the purpose of facilitating the acquisition of Global. Golden Cycle contends that its demands are relevant to valuing its investment in Global as well as to the consent solicitation. The evidence on this is not persuasive. I find, to the contrary, that Golden Cycle's purpose in demanding the requested materials is not to value its recently acquired investment in Global, but for the purpose of valuing Global as a whole in order to determine whether and how much to increase its tender offer. As Vice Chancellor Jacobs stated in BBC Acquisition "[v]aluing a stockholder's interest in the corporation is a proper purpose. Valuing the corporation for the sole purpose of acquiring it, unrelated and without regard to the acquiror's particular and pre-existing investment in the corporation, is not." BBC Acquisition, 623 A.2d at 91. For the same reason, I find that Golden Cycle's stated purpose for its demand is not a purpose related to its interests as a stockholder, as is required in a Section 220 demand.
Plaintiff attempts to distinguish BBC Acquisition from this action by emphasizing the fact that the plaintiff in BBC Acquisition held only 100 shares in the company, while plaintiff in this action has invested millions in Global stock and is the Company's largest stockholder. This fact, however, was not central to the Court's determination that the plaintiff had failed to state a proper purpose. The Court's conclusion was not based on the plaintiff's ownership interest. Rather, Vice Chancellor Jacobs focused on the fact that the plaintiff was seeking to value the company as a whole rather than merely his investment in the company. Moreover, plaintiff only recently acquired its interest in Global, in connection with its decision to seek to acquire 100 percent of Global. It is simply not believable that plaintiff's motivation in this matter is to value those recently acquired shares, and not the enterprise as a whole.
I reach the same conclusion as to the plaintiff's argument regarding the consent solicitation, which has been undertaken merely as an adjunct to Golden Cylce's tender offer. As a general matter, of course, it is a proper purpose to seek information in order to communicate with other shareholders regarding a proxy or consent solicitation. Here, however, the consent solicitation is undertaken simply as one element of Golden Cycle's tender offer strategy. Indeed, the very purpose of the consent solicitation is to replace Global's current directors with directors who will promptly auction off the company. Thus, the consent solicitation is intended only to provide a way for the stockholders of Global to circumvent the board of directors should the stockholders determine collectively to pursue a transaction with Golden Cycle in spite of the directors' continuing opposition. Thus, because the two undertakings are inextricably linked with one another, I conclude that the consent solicitation cannot, independently, furnish the requisite "proper purpose" for the Section 220 demand.
Petitioner also asserts that the demands are relevant to testing the good faith basis of Global's published projections (i) in light of the use of those projections in Global's opposition to the consent solicitation; (ii) the material difference between the published projections and lower ones Global used internally; and (iii) the "evidence" of past attempts to manipulate financial statements to support its projections. Golden Cycle is correct that investigating corporate mismanagement is a proper purpose for inspection. Security First Corp. v. U.S. Die Casting and Dev. Co., Del. Supr., 687 A.2d 563, 567 (1997). Golden Cycle's primary purpose, however, relates to the valuation of Global as an entirety. Thus, because the other claimed purposes ( i.e. the consent solicitation and mismanagement purposes) do not "stand on the same independent and equal footing" as Golden Cycle's valuation purpose, they are secondary and, therefore irrelevant. See BBC Acquisition, 623 A.2d at 91. Further, access to the requested information depends on whether Golden Cycle has established a credible basis to find probable wrongdoing. See Security First Corp., 687 A.2d at 567 (stating credible evidence must be shown by preponderance of the evidence). At the trial, Golden Cycle failed to introduce evidence sufficient to meet this burden.
I also note that in my Memorandum Opinion dated May 20, 1998, I denied Golden Cycle's motion for a preliminary injunction requiring, inter alia, disclosure of similar valuation related information. Because the Company's board of directors was in the process of examining alternatives to Golden Cycle's $18 offer, I concluded that, at least for some time and in the circumstances then shown to exist, the Company could refuse to provide the information to Golden Cycle, except on terms requiring a reasonable confidentiality and standstill agreement, as was required of other interested bidders. To grant Golden Cycle access to this information in the present action and to permit its free dissemination in Golden Cycle's consent solicitation would undermine the rationale of that decision. And, while I recognize that the right to proceed under Section 220 is independent of other means of access to information, such as discovery in litigation, the Court nevertheless has broad powers under Section 220 to prevent dissemination of corporate information in ways that threaten potential injury to the interests of the corporation and its stockholders in general.
For all the foregoing reasons, judgment will be entered in favor of the defendant and the Complaint dismissed with prejudice. IT IS SO ORDERED.