Opinion
Civil Action No. 018-N.
Date Submitted: April 5, 2004.
Date Decided: July 30, 2004.
David L. Finger, Esquire of Finger Slanina, P.A., Wilmington, Delaware, Attorneys for Plaintiffs.
Thomas J. Allingham, II, Esquire and James A. Whitney, Esquire of Skadden Arps Slate Meagher Flom LLP, Wilmington, Delaware, Attorneys for Defendant.
MEMORANDUM OPINION
Marathon Partners L.P. ("Marathon") and Furtherfield Partners, L.P. ("Furtherfield") (collectively "Plaintiffs") are stockholders of MF Worldwide Corporation ("MFW"). Plaintiffs applied to this Court to compel inspection of certain lists of stockholders and books and records of MFW pursuant to 8 Del. C. § 220. This is the Court's post-trial opinion in this action. For the reasons and subject to the limitations stated below, the Court will grant Plaintiffs' applications with respect to the lists of stockholders, deny Marathon's application to compel inspection of books and records relating to the Schweitzer-Mauduit International ("SMI") transaction, and grant Furtherfield's application to compel inspection of books and records relating to the Mafco Consolidated Group Inc. ("Mafco") purchases to the limited extent indicated.
I. FACTS
MFW is a publicly traded Delaware corporation subject to the reporting requirements of the federal securities laws. MFW is primarily engaged in the business of producing licorice flavors and other flavoring agents and whole and processed plant products. MFW manufactures a substantial amount of the licorice flavoring sold worldwide to end-users. A substantial amount of its sales are to the tobacco industry for use as flavoring and moistening agents in the manufacture of American blend cigarettes and other tobacco products.
Ronald O. Perelman ("Perelman") is a director of MFW and beneficially owns a large amount of MFW's stock through Mafco. MFW authorized Mafco to purchase 750,000 additional MFW shares on the open market. If Mafco purchased all of the authorized shares, its ownership percentage would increase from 36.2% to 41.3% of the outstanding shares. If Perelman exercised an existing option on an additional 500,000 shares his beneficial ownership would increase to about 42.8%.
Plaintiffs have been stockholders of MFW at all times relevant to this proceeding. On August 20, 2003, Furtherfield sent a letter to Howard Gittis ("Gittis"), President and CEO of MFW, demanding access to inspect and copy four categories of books and records and MFW's stock ledger. Specifically, Furtherfield sought to inspect and copy:
(1) any internal valuations of [MFW];
(2) any documents regarding offers, proposals, solicitations, or presentations regarding the sale of MFW, or any of its assets, to a third party;
(3) any documents sent to, received from, or reflecting conversations with any third party regarding the sale of [MFW], its shares, or its assets; and
(4) any documents regarding any updates, revisions, or modifications to MFW's internal financial estimates over the next five years.
PTX 2 at 1.
Furtherfield's stated purpose was to "fully determine the true value of MFW shares owned by it." On August 28, 2003, MFW denied Furtherfield's demand for inspection.
Id. at 1-3.
On October 1, 2003, Cede Co. sent a letter on behalf of Marathon to Gittis demanding access to MFW's lists of stockholders of record, including any magnetic computer tape lists. The letter also sought and books and records in various categories paraphrased below.
(1) With respect to solicitations of interest in selling or buying, proposals or offers to sell or purchase MFW, a controlling interest in, the assets of, or the licorice business of MFW (a "Possible MFW Transaction"):
(a) communications or correspondence by, from or on behalf of SMI, its Chairman and CEO Wayne H. Deitrich ("Deitrich"), CFO Paul Roberts ("Roberts") or any other officer of SMI or any other person or entity, relating to a Possible MFW Transaction;
(b) documents reflecting offers, proposals, solicitations, or presentations prepared by or for MFW, SMI, Deitrich, Roberts, or any other person or entity regarding a Possible MFW Transaction;
(c) documents, correspondence, or inquiries authorized or sent by, for or on behalf of MFW to SMI, Deitrich, Roberts, or any other person or entity, or vice versa relating to a Possible MFW Transaction;
(d) any documents by, from or on behalf of MFW to any board member of MFW directing or authorizing such board member to seek out, identify, approach, or communicate with SMI, Deitrich, Roberts, any other officer of SMI, or any other person or entity to solicit, or receive information regarding such person's or entity's interest in a Possible MFW Transaction;
(e) documents reflecting conversations with SMI, Deitrich, Roberts, or any other person or entity relating to a Possible MFW Transaction;
(2) any internal valuations of MFW; and
(3) documents or records regarding, reflecting or relating to any updates, revisions, or modifications to MFW's internal financial estimates over the next five years.
PTX 1 at 1-3.
Marathon's stated purposes were:
(1) to permit Marathon Partners L.P. to gather information relating to a potential shareholder derivative action;
(2) to assess the value of its shares in MFW;
(3) to permit Marathon to ascertain MFW's condition and affairs so that it can vote or otherwise exercise its rights in an informed manner;
(4) to permit Marathon to communicate with other stockholders regarding the management of MFW and potential failure of the management of MFW to fulfill its obligations to stockholders; and
(5) to investigate and communicate with other stockholders to effect a change in management policies relating to the receipt and investigations of inquiries and proposals to purchase all or part of MFW.
Id. at 3-4.
Mario Cibelli ("Cibelli"), Marathon's principal, stated that MFW's board was subservient to Perelman, a significant stockholder of MFW, and Gittis. Cibelli identified two actions on which a potential derivative suit might be based: (1) an alleged failure to give due consideration to an indication of interest from SMI; and (2) an alleged failure to restrict certain purchases of MFW stock by Mafco. On October 8, 2003, MFW denied Marathon's demand for inspection.
Trial Transcript ("Tr.") 149-52.
On October 6, 2003, Furtherfield sent a second letter to MFW demanding inspection of its lists of stockholders and the following categories of books and records:
(a) communications or other writings relating to proposals by Perelman to purchase shares of MFW;
(b) valuations of MFW;
(c) notes, records, data and other information and supporting documentation on which any valuations of MFW were based or which were considered in any valuation of MFW;
(d) documents reflecting discussions, conferences, or other communications among the members of the Board of Directors regarding the purchase of shares of MFW by Perelman;
(e) documents reflecting MFW's internal financial estimates over the next five years or reflecting any updates, revisions, or modifications of such estimates; and
(f) any document or other writing by, from or on behalf of MFW or the Board of Directors relating to MFW's stock buy back plan and the purchase or proposed purchase of shares of MFW by Perelman.
PTX 3 at 1-3.
Furtherfield's stated purposes for the demand were:
(1) to permit Furtherfield to value its shares of stock in the Corporation;
(2) to determine the basis for the Board of Directors permitting or authorizing certain purchases by Mafco;
(3) to ascertain MFW's condition so that Furtherfield could vote and otherwise exercise its shares in an informed manner;
(4) to permit Furtherfield to communicate with other stockholders regarding the management of MFW and potential failure of management to fulfill its obligations to stockholders; and
(5) to investigate and communicate with other stockholders to effect a change of management policies relating to information provided to stockholders in relation to proposed purchases by insiders of MFW.
Id. at 1-4.
On October 16, 2003, MFW denied Furtherfield's second demand for inspection.
Plaintiffs filed an action under 8 Del. C. § 220 to compel MFW to permit the demanded inspection. Trial was held on January 22, 2004.
II. STANDARDS
Section 220 of the Delaware General Corporation Law ("DGCL") requires that a stockholder seeking inspection of books and records: (1) be a stockholder of record; (2) comply with the form and manner requirements when making the demand; and (3) state a proper purpose for the requested inspection. It is undisputed that Plaintiffs were stockholders of record at all times relevant to this proceeding and that they have complied with section 220's form and manner requirements in delivering their requests for inspection. The disputes in this case are: (1) what is each Plaintiff's purpose for seeking inspection; (2) whether that purpose is proper under the facts presented; and if so (3) whether their requests are properly tailored to that purpose.
The Court is not required to accept Plaintiffs' stated purpose as their true purpose. Rather, the Court may consider Plaintiffs' actual purposes as determined from the evidence presented at trial, not just the purposes articulated in their demands. Because a stockholder often will have more than one, the requirement that he show that his purpose is proper has been construed to mean that he must show that his primary purpose is proper. The Court may discount any secondary or ulterior purposes.
See, e.g., Thomas Betts Corp. v. Leviton Mfg. Co., 681 A.2d 1026, 1033 (Del. 1996); Golden Cycle, LLC v. Global Motorsports Group, Inc., 1998 WL 326680, at *2 (Del.Ch. June 18, 1998); BBC Acquisition Corp. v. Durr-Fillaurer Med., Inc., 623 A.2d 85, 91 (Del.Ch. 1992) (rejecting plaintiffs' stated purposes).
BBC Acquisition, 623 A.2d at 88.
CM M Group, Inc. v. Carroll, 453 A.2d 788, 792 (Del. 1982).
Section 220 of the DGCL defines a "proper purpose" as one "reasonably related to [the requesting] person's interest as a stockholder." It is the corporation's burden to demonstrate that a plaintiff does not have a proper purpose for seeking inspection of stocklists. In contrast, it is the stockholder's burden to establish that she has a proper purpose for seeking to inspect books and records other than stocklists.
8 Del. C. § 220(c); Compaq Computer Corp. v. Horton, 631 A.2d 1, 3 (Del. 1993).
8 Del. C. § 220(c). E.g., Thomas Betts Corp. v. Leviton Mfg. Co., 685 A.2d 702, 715 (Del.Ch. 1995), aff'd, 681 A.2d 1026 (Del. 1996).
In order to demonstrate a proper purpose when seeking to investigate possible mismanagement, a stockholder must "present some credible basis from which the Court can infer that waste or mismanagement may have occurred." Stockholders are not required to show actual mismanagement, but they must show, by a preponderance of the evidence, that there is a possibility of mismanagement. Stockholders cannot satisfy this burden merely by expressing disagreement with a business decision. When a business judgment forms the basis of a request for books and records, a stockholder must show a credible basis for an inference that management suffered from some self-interest or failed to exercise due care in a particular decision.
Thomas Betts, 681 A.2d at 1031.
Id.; Sec. First Corp. v. U.S. Die Casting Dev. Co., 687 A.2d 563, 565 (Del. 1997).
Everett v. Hollywood Park, Inc., 1996 WL 32171, at *5-6 (Del.Ch. Jan. 19, 1996) (rejecting challenges to business judgments without a credible basis from which the Court could infer self-dealing or failure to exercise due care).
Id.; Weiland v. Cent. S.W. Corp., 1989 WL 48740, at *2 (Del.Ch. May 9, 1989) (dismissing section 220 action for failure to allege facts from which court could infer a lack of independence or failure to exercise due care).
The Delaware Supreme Court has encouraged the use of a section 220 action to meet the specificity requirements of Court of Chancery Rule 23.1 before filing a derivative suit. The Court also has noted, however, that its encouragement of stockholders to file section 220 actions before filing a derivative suit has not eviscerated or modified the need for a stockholder to show a proper purpose for a request under section 220.
See, e.g., Scattered Corp. v. Chicago Stock Exch., 701 A.2d 70, 78 (Del. 1997); Rales v. Blasband, 634 A.2d 927, 935 n. 10 (Del. 1993).
E.g., Thomas Betts, 681 A.2d at 1031 n. 3.
"A stockholder's right to inspect and copy a stocklist is not absolute. Rather, it is a qualified right depending on the facts presented." If a court orders inspection of books and records or stocklists, the court has wide discretion in determining the proper scope of inspection in relation to the stockholder's purpose. The scope of inspection should be circumscribed with precision and limited to those documents that are necessary, essential and sufficient to the stockholder's purpose. Moreover, it is "entirely reasonable" for a court to make the execution of a confidentiality agreement a prerequisite for inspection.
Compaq, 631 A.2d at 4.
8 Del. C. § 220(c); Thomas Betts, 681 A.2d at 1035.
BBC Acquisition, 623 A.2d at 88-89.
Stroud v. Grace, 606 A.2d 75, 89 (Del. 1992); Thomas Betts, 685 A.2d at 709-10.
III. ANALYSIS A. The Panavision Transaction
In 2001, MFW purchased stock from Perelman in what the parties refer to as the Panavision transaction. Plaintiffs were among a group of stockholders that sued the corporation for its part in that transaction. The parties settled and the transaction was rescinded. Plaintiffs argue that the Court should assess whether or not they have demonstrated a proper purpose to investigate mismanagement involving two subsequent transactions in light of the 2001 Panavision transaction and settlement. MFW contends that the 2001 Panavision transaction is not relevant to whether Plaintiffs have a proper purpose in this case to investigate mismanagement with regard to events in May and September 2003.Plaintiffs' prior experience with MFW may have heightened their suspicion of MFW. That heightened suspicion, however, is not relevant to the issue before the Court-namely, whether Plaintiffs have shown a credible basis from which the Court can infer the possibility of mismanagement in 2003. Plaintiffs' "subjective belief that wrongdoing has occurred is insufficient to meet the evidentiary burden required to compel inspection." Therefore, the Court will sustain MFW's relevance objection to evidence relating to the Panavision transaction. The Court will not consider that transaction in its analysis of whether Plaintiffs have stated a proper purpose to investigate mismanagement.
Thomas Betts, 681 A.2d at 1032; see also Sec. First, 687 A.2d at 567-68.
B. Is Marathon Entitled to Inspection? 1. What is Marathon's Purpose?
In its demand, Marathon listed a number of purposes for seeking inspection. Yet, at trial and in its briefs Marathon focused its demand for books and records on investigating MFW's purported failure to pursue a transaction with SMI. Marathon mentioned its other purported purposes only in passing. The Court finds that Marathon's primary purpose in seeking books and records was to investigate the possibility of mismanagement with regard to a possible SMI transaction. Therefore, the Court will focus its analysis on that purpose.
2. Is Investigating Communications and Documents Regarding a Possible Transaction with SMI a Proper Purpose?
Marathon stated that its representative, Cibelli, was told by SMI that SMI had communicated a potential acquisition price to MFW of $9 to $9.50 per share, a premium to market. Marathon has expressed its belief that MFW failed to pursue the possibility of a sale of the company to SMI. At trial, the evidence provided a more complete picture of the "proposed transaction."
Tr. 122-23.
Before the Court addresses whether Marathon's showing is sufficient to meet its burden of proof, some additional factual background is necessary. Theo Folz ("Folz"), a director of MFW, approached SMI in August 2000 to discuss the possibility of a transaction. SMI investigated the possibility between August and September 2000 and discussed it with its audit committee and investment bankers. Deitrich informed Folz in September 2000 that SMI valued MFW at $9 to 9.50 per share based on publicly available information. MFW rejected this preliminary price as too low and indicated that it would want a more substantial premium. The discussions terminated because the parties were too far apart on price.
According to Plaintiffs, SMI is a sizeable, well-financed company that sells various products to large cigarette manufacturers.
Folz contacted Deitrich again in January 2003 and asked if he thought that it was time to reconsider a merger. In March 2003, Marathon's principal, Cibelli, arranged a meeting with officers of SMI to discuss a possible acquisition of MFW by SMI. During the course of his presentation to SMI, Cibelli informed SMI that in prior litigation, MFW's board of directors had stated that MFW's stock was worth $4 per share. Cibelli also told Deitrich that, based on that prior position, MFW would have to accept an offer significantly higher than $4 and that he would be willing to sue MFW to force a transaction. On behalf of Marathon, Cibelli also requested a finder's fee of $300,000 plus a variable amount based on the transaction price. At trial, Cibelli conceded that the disclosure regarding the MFW stock being worth $4 per share would hinder MFW's ability to get the best price in a transaction with SMI.
Deitrich testified that SMI understood that Cibelli was a significant stockholder of MFW. Deitrich Dep. at 84.
Tr. 178-80; Deitrich Dep. 55. To the extent Marathon filed this action seeking books and records to pressure MFW to sell by using the transaction teed up by Cibelli with MFW's own confidential information as a lever to obtain those records, it is not a proper purpose. See Thomas Betts, 681 A.2d at 1031-33.
In an example reviewed at trial, that variable amount would have been approximately $1.25 million. Tr. 180-82.
Id. at 177.
Deitrich contacted Folz in May 2003, after Cibelli's presentation, to discuss the possibility of a transaction. According to Cibelli, Paul Roberts ("Roberts"), SMI's CFO, told Cibelli that Deitrich told Roberts that Folz responded that Gittis (MFW's CEO) had said that "MFW is not for sale at any price." Folz's alleged statement is arguably hearsay, and there is some dispute as to whether he even made the statement. For purposes of this opinion, the Court will assume that he did. Whatever Folz may have said, however, SMI's Dietrich testified that he did not consider Folz's response to be a rejection, but rather an invitation for SMI to "put [its] money on the table." The negotiations did not proceed any further; indeed, MFW and SMI never entered into a confidentiality agreement or exchanged nonpublic information.
Deitrich told Cibelli that SMI might be willing to pay more for MFW than it had previously offered, but there is no indication that Deitrich ever conveyed that information to MFW. Tr. 212-14; Deitrich Dep. 35.
Tr. 129 (Cibelli); Deitrich Dep. 36-37, 111.
Deitrich Dep. at 95-96.
Even after Gittis's alleged statement that MFW was not for sale, Cibelli continued to prod SMI to press for a transaction. But SMI was not interested. As Deitrich explained:
We were trying to get the point across [to Cibelli] that we really weren't going to do anything about this. If we could do anything, it was going to be a friendly takeover but — or a friendly offer, but we weren't in a position to do that until later, if we did anything.
Id. at 83.
Plaintiffs objected to the admission of the Deitrich deposition for any purpose other than his communication with Cibelli. MFW contends that Deitrich's deposition is relevant and admissible to impeach Cibelli's deposition and trial testimony. Cibelli testified that he heard third-hand that Folz, a director of MFW, told Deitrich that Gittis said that MFW is not for sale at any price. To the extent Dietrich denied Folz made the purported statement about what Gittis said, the Court will sustain Marathon's objection. During discovery, Marathon sought to depose both Folz and Gittis, and MFW objected. The Court precluded the depositions on the grounds, among others, that precisely what was said between representatives of SMI and MFW was not relevant to determining what Cibelli and Marathon, who were not parties to those conversations, knew and whether Marathon had a proper purpose for investigating mismanagement at the time it made its demand By the same reasoning, the Court will not permit MFW to rely on Dietrich's testimony to rebut Cibelli's account of what Folz reportedly said.
Tr. 127-29, 225-26.
The Court is not persuaded, however, by Marathon's objection to the remainder of Dietrich's testimony. Dietrich was SMI's chairman and CEO. Marathon's purpose of investigating mismanagement is based on an allegation that MFW failed to give proper consideration to a proposed transaction with SMI. Those allegations are based almost entirely on communications between Marathon and SMI, including Deitrich. Therefore, the Court finds that Deitrich's testimony is relevant to whether Marathon can meet its burden of showing by a preponderance of the evidence that there is a credible basis from which the Court can infer the possibility of mismanagement.
MFW disparages Marathon's reliance on Gittis's alleged statement that MFW was not for sale as being based on quadruple hearsay. Marathon counters that Cibelli's testimony is not hearsay because it was not offered for the truth of the matter asserted, i.e., that MFW was not for sale at any price, but rather for Cibelli's subjective belief that mismanagement was occurring. Cibelli's testimony about Gittis's purported comments may not be hearsay for that limited purpose. It is hearsay, however, to the extent it is offered to prove what Gittis, in fact, said. Furthermore, the multiple hearsay nature of Cibelli's testimony seriously undermines its probity as a basis for inferring mismanagement.
Plaintiffs also contend that Folz's statement is a statement against interest admissible under Delaware Rule of Evidence 804(b)(3). The Court disagrees. The statement when made, was not "so far contrary to the declarant's pecuniary or proprietary interest, or [such that it] so far tended to subject the declarant to civil or criminal liability . . . that a reasonable person in the declarant's position would not have made the statement unless the declarant believed it to be true," as required by DRE 804(b)(3). A statement by a director of a company to a potential acquiror that the president and CEO of the company said the "corporation is not for sale at any price" reasonably might be interpreted as an invitation for the potential acquiror to put their money on the table. Deitrich, who was less biased and more directly involved than Cibelli, testified that this was the understanding he had of his conversation with Folz.
Deitrich Dep. 95-96.
Even with the admission of Gittis's statement for the limited purpose of showing Cibelli's subjective belief, Marathon fails to carry its burden. Although Cibelli may have believed that mismanagement may have been occurring, his testimony was undercut by Deitrich's. Notably, Deitrich and SMI are third parties to this litigation. Deitrich's deposition demonstrates that by May 2003 or so SMI was not really going to do anything about MFW and that he did not understand Folz's response to his request to discuss an acquisition to be an outright rejection of any offer that SMI might make. Dietrich's deposition also demonstrated that the discussions were in their infancy and there was no reason to ask for nonpublic information or up-to-date financials.
Id. at 83.
Id. at 95.
Id. at 97.
The evidence presented by Marathon does not support an inference of mismanagment. Cibelli testified that he was suspicious as to why MFW was not interested in the transaction that he had been pressing. Deitrich's deposition, however, shows that SMI's "offer" was nothing more than a preliminary overture. The rejection of SMI's preliminary overture was squarely within the realm of MFW's business judgment. Marathon failed to present a credible basis from which the Court could infer that the MFW board of directors had a conflict of interest or that MFW failed to consider a transaction. Rather, the evidence shows that MFW initiated communications with SMI but was not interested in doing a deal at the price suggested by SMI. The record also indicates that SMI was not interested in doing a deal on hostile terms, despite Cibelli's prodding. Finally, notwithstanding Cibelli's attempts to "tee up" a transaction, there is no indication that MFW was "in play" such that the so-called Revlon duties would be applicable.
Plaintiffs must show that there is a possibility of mismanagement, not actual mismanagement. Thomas Betts, 681 A.2d at 1031. The Court must, however, be able to infer the possibility of mismanagement by a "credible showing, through documents, logic, testimony or otherwise that there are legitimate issues of wrongdoing." Sec. First, 687 A.2d at 568.
Marathon tries to bootstrap its argument about mismanagement as to the SMI discussions by vaguely suggesting a possible link in terms of MFW's approach to those discussions and the later stock purchases by Perelman. Plaintiffs' Opening Brief at 11-12; Plaintiffs' Reply Brief at 2. There is no evidence to support the existence of such a link. Thus, the Court does not find Marathon's suggestion credible.
Disagreement with a business decision, in the absence of evidence from which the Court may infer a possible breach of fiduciary duty, does not create a credible basis from which the Court can infer mismanagement. See Everett, 1996 WL 32171, at *5-6. Marathon repeatedly noted in their papers that SMI's offering price was above market, and that the rejection was therefore suspect. The Court notes, however, that MFW is currently trading at a price greater than that proposed by SMI and nearly twice the price at which it was trading in 2003. PTX 18 at 9. While not determinative, this fact corroborates the conclusion that Marathon has offered little more than speculation of mismanagement with regard to MFW's dealings with SMI.
Revlon v. MacAndrews Forbes Holdings, Inc., 506 A.2d 173 (Del. 1985) (holding that when a break-up of the company becomes inevitable the board's responsibilities under Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 496 (Del. 1985), are significantly altered, the question of defensive measures becomes moot, and the board is charged with getting the best price reasonably available for the stockholders); see also Paramount Communications, Inc. v. QVC Networks, Inc., 637 A.2d 34 (Del. 1994).
The Court finds that Cibelli's testimony of his understanding of Folz's conversation with Dietrich regarding Gittis's response, as it was relayed to him by Roberts, is not sufficient for the Court to infer that mismanagement may have occurred. This conclusion is buttressed by the facts that Marathon attempted to tee up a transaction by giving a potential buyer confidential information that would hamstring MFW in negotiations with the buyer, requested a finders fee and a percentage of the transaction for its efforts and offered to sue MFW to force a transaction. Marathon has not presented a proper purpose to demand inspection of books and records related to the proposed transaction with SMI. Thus, Marathon's application to compel inspection of MFW's books and records related to that subject will be denied.
Hearsay, absent some "special indicia of reliability and trustworthiness," is not credible evidence. Smith v. State, 647 A.2d 1083, 1088 (Del. 1994); Thomas Betts, 685 A.2d at 710 (finding hearsay statement insufficient to create a credible inference that mismanagement was occurring).
3. Marathon's Secondary Purposes
Marathon's secondary purposes of assessing the value of its shares in MFW and ascertaining MFW's condition and affairs so that it can vote or otherwise exercise its rights in an informed manner are insufficient to meet the requirements of section 220. Valuing one's shares is, theoretically, a proper purpose. Marathon, however, presented no evidence showing that the publicly available information is insufficient to value its publicly traded shares beyond a conclusory statement in its Post-trial Reply Brief (p. 5) that "[p]ublicly available information concerning the valuation of MFW shares has been widely conflicting." Marathon failed to show a present need for valuation or why inspection of documents beyond what is publicly available is necessary to permit it to satisfy its stated purpose. Likewise, Marathon presented no reason or evidence demonstrating that it would need nonpublic information from MFW, that would put it at an informational advantage over other stockholders, so that it could vote and exercise its rights in an informed manner.
Another secondary purpose Marathon mentioned, exploring a potential shareholder action, is clearly related to the possible SMI transaction and fails for the same reasons stated above. See also discussion of Mafco purchases at p. 24, supra.
See Helmsman Mgmt. Servs., Inc. v. A S Consultants, Inc., 525 A.2d 160, 167-68 (Del.Ch. 1987).
See id.
4. Is Communicating with Stockholders a Proper Purpose for Demanding Access to MFW's Stocklists?
In seeking inspection of MFW's lists of stockholders, Marathon stated that it wanted to communicate with other stockholders to effect a change in management policies relating to the receipt and investigations of inquiries and proposals to purchase all or part of the company. MFW did not produce evidence showing that communicating with other stockholders to try to effect a change in management policies is not Marathon's purpose or that it is an improper purpose. Instead, MFW argued that Marathon's purposes were adverse to MFW.
The Court will compel MFW to permit Marathon to inspect its lists of stockholders. The inspection, however, will be conditioned on Marathon entering into an appropriate confidentiality agreement. That agreement should limit Marathon's use of the lists of stockholders to its stated and proper purpose of communicating with other stockholders to effectuate a change in management policies relating to the receipt and investigation of inquiries and proposals to purchase all or part of the company. Such an agreement will sufficiently address MFW's concerns that the information will be used for purposes adverse to MFW.
C. Is Furtherfield Entitled to Inspection? 1. What is Furtherfield's Purpose?
Furtherfield demanded to inspect MFW's books and records in order to investigate MFW's approval of certain open market purchases of MFW stock by Mafco, which is controlled by Perelman. According to Furtherfield, Mafco's purchases violated of Article Eleventh of MFW's certificate of incorporation. Furtherfield also contends that Mafco's open market purchases are suspicious because other stockholders do not have access to the same information and valuations that Mafco had in making its purchasing decisions. Furtherfield presented very little evidence with regard to their other stated purposes, and mentioned them in their briefs only in passing. The Court finds that Furtherfield's primary purpose was to investigate the Mafco purchases.
2. Is Investigating the Mafco Purchases a Proper Purpose?
Perelman is a director and beneficial holder of approximately 40% of MFW's outstanding stock through Mafco. Between September 18, 2003 and October 1, 2003, Mafco purchased approximately 179,500 shares of MFW in the market at prices ranging from $9.56 to $9.70 per share. Mafco purchased 219,200 additional shares in November and December 2003 for prices ranging from $12.74 to $12.85 per share.
Article Eleventh of MFW's certificate of incorporation requires that the Board of Directors approve stock purchases by any person or entity who beneficially owns more than 5% of the then-issued and outstanding shares of the common stock. This provision is designed to protect MFW's ability to utilize its net operating loss ("NOL") carryforwards. Mafco's purchases would require board approval because Perelman beneficially owns more than 5% of the shares of MFW.
MFW demonstrated that Furtherfield's Breen had not looked at MFW's certificate of incorporation before making his demand Nevertheless, MFW failed to show that Breen lacked a basic understanding of MFW's ability to prevent acquisition of shares that would be detrimental to its NOL carryforwards.
In fact, as of September 2003, Perelman was the beneficial owner of more than 36% of MFW's common stock.
Mafco's purchases were properly authorized if the Board,
with the advice of counsel, determine[d] that in the judgment of the [board] such Transfer (i) [was] not likely to materially and adversely affect the Corporation's abilities to utilize the [NOL] carryforwards to which it [was] then entitled under the IRC or (ii) [was] otherwise in the best interests of and provides a substantial benefit to the Corporation and its shareholders.
PTX 10 at MFW 0124-25 (MFW Certificate of Incorporation, Article Eleventh).
MFW suggests in its papers that its approval of the Mafco purchases was permissible under Article Eleventh.
Defendant's Answering Post-Trial Brief at 26-32.
Furtherfield notes that MFW's November 5, 2003 Form 13D filing states that the Board approved Mafco's share purchases, "having determined that such number of shares can be purchased without materially and adversely affecting the Company's [NOL] carryforwards." Furtherfield also points out that the 13D filing contained no indication, and no evidence was presented, that MFW sought or obtained the advice of counsel, that the Board gave its approval before Mafco's purchases, or that the Mafco purchases would not affect MFW's ability to "preserve and utilize" its NOL carryforwards.
PTX 8 at FPL 000049.
Section 220 does not give stockholders a right to conduct a broad fishing expedition. As this Court recently observed:
E.g., Freund v. Lucent Tech., Inc., 2003 WL 139766, at *4 (Del.Ch. 2003).
Entitlement to inspection under § 220 for a stockholder demonstrating a proper purpose is "not open-ended; it is restricted to inspection of the books and records needed to perform the task. . . ." Therefore the order allowing plaintiff's requested books and records inspection will be limited to those documents reasonably required to satisfy the purpose of the demand
Carapico v. Philadelphia Stock Exch., Inc., 791 A.2d 787, 792-93 (Del.Ch. 2000) (Lamb, V.C.).
Moreover, the Court "has wide latitude in determining the proper scope of inspection [and] it is the responsibility of the trial court to tailor the inspection to the stockholder's stated purpose."
Sec. First, 687 A.2d at 569.
The Court finds Furtherfield has stated a proper purpose with regard to its demand to inspect MFW's books and records to determine whether the MFW Board had received the advice of counsel when it approved the Mafco purchases, whether the MFW board approved these transfers prior to the transactions, and what information MFW had at the time of its approval regarding whether the purchases would affect MFW's ability to preserve and utilize its NOL carryforwards or otherwise were in the best interests of and provided a substantial benefit to MFW and its stockholders. The inspection will be limited to these issues and subject to the execution of an appropriate confidentiality agreement.
MFW shall provide Furtherfield a privilege log with respect to all requested documents on this subject withheld under a claim of privilege.
MFW avers that the Board acted properly in authorizing the Mafco purchases. Furtherfield shall be permitted to inspect MFW's records to verify that MFW indeed acted in accordance with its certificate. This is not to suggest, however, that MFW had a duty to disclose any authorization of transfers in its public filings.
See p. 20, supra.
Furtherfield presented no evidence or legal authorities from which the Court can infer that permitting Mafco to make open market purchases would constitute a breach of a duty, under Article Eleventh of the Certificate of Incorporation or otherwise, to try to prevent such purchases by Mafco, even if Perelman was a director. The Court will not, therefore, order inspection of books and records concerning a possible breach of fiduciary duty in failing to prevent Mafco's open market purchases.
To the extent that Furtherfield demands access to the MFW books and records to investigate the information on which Mafco made its open market purchases, the request is denied. Furtherfield presented no evidence from which the Court can infer that permitting Mafco to make open market purchases was improper. Furtherfield seems to speculate, for example, about insider trading, but it presented no credible evidence to support such an inference. Furtherfield's unsupported speculation is not sufficient to enable the Court to infer the possibility of mismanagement.
2. Did Furtherfield Demonstrate a Proper Purpose of Valuing its Shares?
Like Marathon, Furtherfield stated that it sought to value its shares in MFW. Like Marathon, Furtherfield presented no evidence showing that the publicly available information is insufficient to value its shares beyond a conclusory statement in its Post-trial Reply Brief (p. 5) that "[p]ublicly available information concerning the valuation of MFW shares has been widely conflicting." Furtherfield thus failed to show a present need for valuation or why inspection of documents beyond what is publicly available is necessary to permit Furtherfield to satisfy its stated purpose.
3. Is Communicating with Stockholders a Proper Purpose for Demanding Inspection of MFW's Stocklists?
MFW presented no evidence showing that Furtherfield's desire to communicate with other stockholders to effectuate changes in management policies relating to information provided to stockholders in relation to proposed purchases by insiders would be improper. Rather, MFW suggested that Furtherfield's purposes are adverse to the corporation. Provided that Furtherfield's use of the information is limited to their stated purposes, the Court finds MFW's argument about possible adverse use unpersuasive. Therefore, the Court will order MFW to permit Furtherfield to inspect the lists of stockholders subject to a confidentiality agreement limiting the use of the lists to Furtherfield's stated purpose.
V. CONCLUSION
For the reasons stated above, Marathon and Furtherfield's applications are granted in part and denied in part as follows. The applications to inspect the lists of stockholders are granted. Marathon's application to inspect books and records relating to the SMI transaction is denied. Furtherfield's application to inspect books and records relating to the Mafco purchases is granted to the limited extent indicated in this opinion, and otherwise denied. All of the inspections ordered above are conditioned on Plaintiffs' entry into appropriate confidentiality agreements to be approved by the Court. The Court leaves it to the parties, in the first instance, to promptly negotiate those agreements.