Opinion
Civil Action No. 9711.
Submitted: March 18, 1988.
Decided: March 22, 1988.
Lawrence A. Hamermesh, Esquire, Kenneth J. Nachbar, Esquire, and Robert J. Valihura, Jr., Esquire, of MORRIS, NICHOLS, ARSHT TUNNELL, Wilmington, Delaware, and Richard F. Ziegler, Esquire, Deborah M. Buell, Esquire, and Martin F. Marvet, Esquire, of CLEARY, GOTTLIEB, STEEN HAMILTON, New York, New York, Attorneys for Plaintiff.
Bruce M. Stargatt, Esquire, and Melanie K. Sharp, Esquire, of YOUNG, CONAWAY, STARGATT TAYLOR, Wilmington, Delaware, and Hugh R. Whiting, Esquire, and Richard I. Werder, Jr., Esquire, of JONES, DAY, REAVIS POGUE, Cleveland, Ohio, Attorneys for Defendant.
MEMORANDUM OPINION
A "NOBO" list is a list of beneficial owners of a corporation's stock who do not object to the disclosure of their name and address by the registered owner of the stock (typically, a stock broker or a bank) to the corporation itself for the limited purpose of facilitating direct communication on corporate matters. NOBO lists are a recent creation of federal law. In promulgating the rules requiring brokers, dealers and banks to create such lists upon the request of the issuing corporation, the Securities Exchange Commission considered whether the corporation's shareholders should themselves be granted the power on the same terms as the issuer to require the production of a NOBO list. See SEC Release No. 34-22533, 50 Fed. Reg. 204 (1985). That has not, however, been done.
See SEC Exchange Act Release No. 21901 (March 28, 1985), CCH Sec. L. Reptr. ¶ 83756, and Release No. 22533 (October 15, 1985), CCH Sec. L. Reptr. ¶ 83930. The Rules creating the NOBO system are contained in SEC Rules 14b-1, 14c-7 and 14a-13, all codified in Part 240 of the Code of Federal Regulations.
In Shamrock Associates v. Texas American Energy Corp., Del. Ch., 517 A.2d 658 (1986), this court held that a corporation that had procured NOBO lists in connection with the solicitation of proxies for an annual meeting was required to share those lists with a stockholder who had established its right under Section 220 of the Delaware General Corporation Law to inspect "a list of [the corporation's] stockholders."
The present action is also one brought under the authority of Section 220 seeking a stock list. The plaintiff is the registered owner of shares of Gillette Company and is presently itself contemplating a proxy contest against the incumbent board of defendant. It seeks a list of beneficial owners of Gillette stock who do not object to the disclosure of their identity to the Company, so that it may communicate with them by telephone to solicit their support in the forthcoming contest. The stipulated record indicates that the identity of the beneficial owners of approximately 17% of the Company's common stock would be disclosed on all NOBO lists.
There is here presented none of the issues that frequently arise in stock list cases: no question about the status of the plaintiff or the propriety of the purpose, and no question about the form or delivery of the demand. Indeed, the Company has already delivered to plaintiff, or agreed to deliver, computer tapes, transfer sheets and depository company breakdowns that constitute all of the materials that various opinions of this court have established as constituting a company's stock list for inspection purposes pursuant to Section 220. In this action, plaintiff seeks in addition, the production of NOBO lists from the various banks and brokers owning Gillette stock. The issue thus raised is, however, not decided by Shamrock Associates, because, unlike Texas American Energy Corporation, Gillette has not obtained any NOBO lists and, unless ordered by this court to do so, has no intention to obtain such lists.
It claims that it has no need for such lists and that the use of a NOBO list in connection with a proxy fight is inconsistent with federal law. Last year, it did obtain NOBO lists, but did not use them for proxy solicitation purposes, but rather, in connection with admitting shareholders to its annual meeting. Since those lists were then discarded, they are not now in the possession of the Company.
Thus, the case presents a question of first impression in this jurisdiction: whether a Delaware corporation has an obligation to obtain from each of the brokers and banks who are the registered owners of its stock, a so-called NOBO list, for the sole purpose of furnishing such lists to a shareholder who has established a right to inspect the Company's stock list when the corporation itself has not obtained and does not plan on obtaining such lists for its own use. While this question is one of first impression, it does not hang suspended in mid-air. Rather, it sits upon a foundation of statutory and case law, most notably including a short line of cases treating the list of beneficial owners disclosed on the so-called "Cede breakdown," which, in some respects, is analogous to NOBO lists. Thus, a sensible way to approach this problem is first to sketch out this statutory and case law background.
I.
Delaware law has long recognized and codified a common law right of a record stockholder to have access to a list or ledger of the corporation's stockholders upon demand, for a proper purpose. See State ex rel. Healy v. Superior Oil Corp., Del. Super., 13 A.2d 453, 454 (1940). Presently, that right is treated in Section 220 of our corporation statute, which, insofar as relevant to this case, provides as follows:
(b) Any stockholder . . . shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records, and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder.
* * *
(c) . . . The Court of Chancery is hereby vested with exclusive jurisdiction to determine whether or not the person seeking inspection is entitled to the inspection sought. . . . The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other or further relief as the Court may deem just and proper.
The question what constitutes "a list of [a corporation's] stockholders" has received a good deal of judicial attention over recent years. Generally, it may be said that the principle that tends to guide decisions in this area is that all specifically identified information relating to the current identity of shareholders in the hands of the corporation should be made available as well to a shareholder who has established entitlement to a "list of stockholders" under Section 220. Thus, our cases, in requiring the production of a "stock list," have required the production of stock transfer sheets, computer tapes and lists of beneficial owners of stock registered on the corporation's book by depository firms such as Depository Trust Co. (the so-called Cede breakdowns). See, e.g., Tannetics, Inc. v. A.J. Industries, Inc., Del. Ch., C.A. No. 4592, Marvel, V.C. (Sept. 4, 1974), 2 Del. Corp. L.J. 348 (1974) (computer tapes).
A handful of those cases set forth the legal precedents chiefly relevant here. Stated chronologically, they include Bear, Stearns Co. v. Pabst Brewing Company, Del. Ch., C.A. No. 5456, Brown, V.C. (November 25, 1977); Giovanini v. Horizon Corporation, Del. Ch., C.A. No. 5961, Brown, V.C. (September 12, 1979); Hatleigh Corp. v. Lane Bryant, Inc., Del. Ch., 428 A.2d 350 (1981); Tactron, Inc. v. KDI Corp., Del. Ch., No. 7885, Berger, V.C. (January 4, 1985); and Shamrock Associates v. Texas American Energy Corp., Del. Ch., 517 A.2d 658 (1986). Excepting the last of these — Shamrock Associates — which, as mentioned above, deals with the question whether a corporation with a NOBO list must produce it as part of its stock list, these cases all deal with the obligation to produce a Cede breakdown. They are instructive because a Cede breakdown is functionally similar in some respect to a NOBO list.
A Cede breakdown (and I use the term in the generic sense it seems to have acquired in our cases to include similar information respecting other stock depository companies such as Kray Co. and Pacific Co.), was described by this court inGiovanini v. Horizon Corporation, supra, as follows:
CEDE Co. is the name utilized by Depository Trust Company to hold shares owned by it. Depository Trust Company is an association of more than 200 brokerage houses and financial institutions which was formed for the purpose of owning shares held in street name for the beneficial interest of customers of the brokerage firms and financial institutions. In other words, the name "CEDE Co." appearing on the corporate stock ledger is thrice removed from the true beneficial owner. The brokerage house owns the stock for the benefit of its customer, but it holds title through the Depository Trust Company which in turn uses the name CEDE Co. for this purpose. This is done, as I understand it, for the benefit of those firms participating in the Depository Trust Company so as to simplify their stock transfer transactions on behalf of their customers.
This mechanism of convenience for the brokerage firms, however, prevents the stock ledger from revealing to one examining it just which brokerage firms own shares and the number of shares owned by each. This information, or "breakdown," can be provided to the corporation at its request. Again, through the wonders of modern computer technology, this can apparently be accomplished in a matter of minutes. Such a breakdown having disclosed the identity of the firms owning stock under the name of "CEDE Co.", contact can then be made with such firms in order to ascertain the number of beneficial owners on whose behalf they hold stock in street name in order that a proper amount of informational materials may then be forwarded to the brokerage firms for distribution to the beneficial owners.
Slip op. at 2. In Giovanini, the court concluded that:
Since the evidence here shows that such a breakdown is readily available to the corporation for the purpose of making its contact with the shareholders, then I feel that such information should be made available to the plaintiff forthwith so that his list of stockholders for his proper purpose of soliciting their proxies is at least equivalent, in this aspect, with the list available to the corporation for the same purpose.
Slip op. at 4.
Two years later, in Hatleigh, supra, the court again required that the corporation produce a Cede breakdown. After quoting from Giovanini, the court there held:
A CEDE breakdown showing the names of the brokerage firms and the number of shares they hold is readily available to Lane Bryant and without it there would be no practical way for Hatleigh to learn how many copies of its proposed communication it should send to CEDE CO. for distribution to the brokerage firms and then to the true owners of Lane Bryant stock.428 A.2d at 354. The court went on to state a general principle and a limitation:
Once having established a proper purpose, a stockholder is entitled to the same lists and data relating to stockholders as is available to the corporation. See Lerman v. Diagnostic Data, Inc., Del. Ch., unreported, (C.A. # 6233-NC, Aug. 11, 1980) and Cargill, Inc. v. Missouri-Portland Cement Co., Del. Ch., unreported (C.A. # 4583-NC, Sept. 11, 1974). To hold otherwise would be to give the corporation an unfair advantage in a proxy solicitation battle. The best interest of the stockholders requires that they quickly receive all the information generated by the competing interests. Lane Bryant, however, is under no obligation to prepare for Hatleigh lists, data, or computer tapes which are not readily available to it and, of course, Hatleigh must pay any costs involved.Id. at 354-55.
The next case in the series is the short, 1985 letter opinion by Vice Chancellor Berger in Tactron, Inc. v. KDI Corporation, cited above. There, the court, placing emphasis upon the use of the word "available" in Hatleigh, held that a corporation could be required to have a Cede breakdown produced as part of a stock list inspection even if the corporation had not already done so. The analysis was brief:
The demand letter sets forth nine categories of stockholder materials. KDI only takes issue with the production of the materials requested in paragraphs 7-9. Paragraph 7 seeks stockholder breakdowns from central depository systems such as Cede Co. KDI acknowledges that these stockholder breakdowns are customarily provided. See, e.g. Goldman v. Aegis Corp., Del. Ch., Civil Action No. 6396, Hartnett, V.C. (April 7, 1981). However, KDI contends that it should only be obliged to provide Tactron those breakdowns KDI itself obtains. I disagree. These breakdowns are readily available to KDI and should be made equally available to Tactron, even if KDI does not request the information for itself. Hatleigh Corp. v. Lane Bryant, Inc., Del. Ch., 428 A.2d 350 (1981).
Slip op. at 3.
The final relevant Delaware authority is Vice Chancellor Berger's thoughtful opinion in Shamrock Associates v. Texas American Energy, supra. That case, decided shortly after the SEC's stockholder communication regulations went into effect, held that a corporation that had exercised its federal right and had acquired lists of certain (i.e., non-objecting) beneficial owners of its stock from the banks and brokers who owned that stock in street name, was obliged to produce a copy of such lists to a shareholder who had shown itself entitled to inspect the Company's stock list. In so holding, this court rejected an assertion that since Rule 14a-13(b)(2) conferred the right to demand a NOBO list only on the issuer, it would be inconsistent with federal law, and thus invalid under the supremacy clause of the United States Constitution, to make that list available to shareholders as a matter of state law. It held that, broadly speaking, disclosure would be consistent with, and indeed would foster, the purposes of the Williams Act.
The courts that have subsequently addressed this question have reached similar conclusions. See Burlington Industries, Inc. v. C.H. Masland Sons, No. 86-3296, ___ F. Supp. ___ (E.D. Pa. June 12, 1986); Baron v. Strawbridge Clothier, No. 86-2474, ___ F. Supp. ___ (E.D. Pa. May 1, 1986).
The court also rejected, on the record before it, the claim that a legitimate privacy interest of the persons who had consented to disclosure of their identity to the corporation — but not presumably to a disclosure to other shareholders interested in engaging in communications respecting corporate affairs — would be infringed by disclosure to plaintiffs.
Finally, the court held that it could detect no material difference for these purposes between a Cede breakdown and a NOBO list. Relying upon the language of Hatleigh indicating that to withhold the Cede breakdown "would be to give the corporation an unfair advantage . . . [and that] the best interest of stockholders requires that they quickly receive all the information generated by the competing interests" ( 517 A.2d at 661), the court required the NOBO lists to be produced.
This case now seeks to complete the analogy between a Cede breakdown and a NOBO list by requiring defendant, who neither has NOBO lists nor plans to get any, to order them for the benefit of plaintiff (or perhaps, it should be said, for the benefit of fuller stockholder communication).
II.
This matter has now been presented to the court for final judgment upon a short stipulation of facts and oral argument. The pertinent background facts are few. I have already indicated the approximate percentage of stock that would be expected to be represented on NOBO lists of Gillette's registered owners and the fact that Gillette has not acquired, nor does it intend to acquire, a NOBO list. Additionally, it might be noted that generally all stock brokers have appointed the Independent Election Corporation of America as their agent for purposes of responding to NOBO list requests from issuers and thus, insofar as brokers are concerned, all non-objecting beneficial owners would be shown on a single list. The same situation does not apparently pertain with respect to banks, who respond to such requests individually. In Gillette's case, there are apparently ten or twelve banks owning its stock and requests to each of those would be necessary. Unlike Cede breakdowns, construction of NOBO lists is not done practically instantaneously; the federal regulations creating the obligation permit ten days for the response to a corporate request to be made.
III.
Federal law creates an option for a registered issuer of corporate stock to require the production of lists of certain beneficial owners of its stock. Federal law creates no duty to do so and the question raised by the case is whether state law creates such a duty in the circumstances here presented. It is, of course, axiomatic that the directors of a Delaware corporation have the right and duty to exercise the powers of the corporation, 8 Del. C. § 141(a), and when a board acts or decides not to act with respect to a particular power, the courts will not intervene to second-guess the wisdom, prudence or advisability of the decision, so long as it appears to have been made advisedly and in good faith. Aronson v. Lewis, Del. Supr., 473 A.2d 805 (1984); Ivanhoe Partners v. Newmont Mining Corp., Del. Supr., ___ A.2d ___, No. 341, Moore, J. (Nov. 18, 1987).
The question what constitutes a "stock list" or what information in the possession of the corporation is to be produced to a shareholder who shows his or her entitlement to inspection of a stock list, is, however, a question of law and not a question of business judgment. Thus, I see a significant difference between cases such as Hatleigh and Shamrock Associates on the one hand, in which the court construes the meaning of the term "stock list" in the light of the information in the hands of the corporation, and cases such as Tactron and this case, which may be viewed as cases in which the court is asked to compel the corporation to take action to change the quantum of information in the hands of the corporation. This difference was, I think, alluded to in Hatleigh when the court noted that:
[The corporation], however, is under no obligation to prepare for Hatleigh lists, data, or computer tapes which are not readily available to it . . .
But, as I view Tactron, it too may be viewed as a case in which the corporation had the Cede breakdown. Hence, I do not read it as standing for the proposition that a corporation may be compelled to create new information or cause it to be created in response to a shareholder stock list demand. The reason I say that is the fact that Tactron and Hatleigh both rely uponGiovanini which indicated that "through the wonders of modern computer technology, this [production of a Cede breakdown] can apparently be accomplished in a matter of minutes." Giovanini,supra at 6. Thus, the Cede breakdown has been viewed as something that can, in effect, be produced instantly. It is, therefore, available to the corporation in a proxy contest immediately when needed, even at the last moment. Accordingly, it can fairly be said that such information is, in a real sense, in the possession of the corporation at all times. As a result, contesting parties cannot be put on substantially the same footing unless a stock list includes depository company breakdowns.
A NOBO list is different in two material respects. First, the evidence demonstrates that such a list takes approximately ten days to produce. It is not immediately available to the issuer. Second, a modern proxy solicitation can hardly be conducted at all without the benefit of a breakdown of the persons for whom a depository company holds its shares. The written proxy materials would all have to be sent to the depository company who would then distribute them to brokers who, in turn, would send them along to beneficial owners. The depository companies are not equipped for this massive forwarding task. Alternatively, search cards could be directed by the issuer to all brokers to find out how many shares they claim to own for others. Without a Cede breakdown, however, an issuer could not tell if responding claims were correct or the proxies valid. Thus, a Cede breakdown is essential to the proxy solicitation process as currently conducted. As a consequence, a registered issuer almost always does have one on hand that is not more than thirty days old.
A NOBO list plays no central role in a proxy contest. While the information it discloses (i.e., the identity of the ultimate owners) may, of course, be of use in telephone solicitations, that information is not necessary for the effective working of the written proxy solicitation process. Once an issuer has acquired that additional information, Shamrock Associates establishes that it has an obligation to disclose it to a shareholder as part of the production of a stock list. But where it has not done so, the ideal of equality of access to information concerning identity of shareholders ought not, in my opinion, go so far as to compel the directors to exercise a judgment to obtain NOBO lists when the corporation itself has no need for them and thus no intention to obtain them.
Only two judicial opinions have been called to my attention in which the question whether a corporation that did not possess a NOBO list should be required to obtain one in order to make it available to plaintiffs. In each, such relief was denied. In an unreported bench ruling, the New Jersey Superior Court rejected, without a statement of reasons, such a request. See Shamrock Associates v. Matrix Corp., N.J. Super., Somerset Co., Diana, J. (December 15, 1987). The Federal District Court for the District of Nevada reached a similar conclusion in Cenergy Corp. v. Bryson Oil Gas, P.L.C., 662 F. Supp. 1144, 1148 (D. Nev. 1987). In that case, the court applied Nevada corporation law, which, in the absence of controlling Nevada authority, apparently looks to Delaware corporation law opinions for helpful guidance. Thus, there the court cited and discussed Hatleigh andShamrock Associates v. Texas American Energy Corp. in recognizing a right to obtain a NOBO list as part of a stock list, but refused to extend Shamrock to require the corporation there involved to "acquire specially any shareholder information which it does not already possess in order to then distribute it to [a shareholder]." 662 F. Supp. at 1148.
I do not put a great weight upon these opinions, as, in neither instance was the point here in issue central to the questions there presented. But each does reflect judicial recognition of the fact that a materially different question is presented when one seeks to compel a board to take an action to change the information in the Company's possession, than is presented when a shareholder seeks, for a proper purpose, to share information that the Company does possess. Neither broad concepts of fairness, nor the words of Section 220, in my opinion, require that a corporation be forced, in each instance, to exercise the option created by the applicable SEC Rules at the behest of a shareholder. What fairness does require, and what our opinions repeatedly return to, is the principle that relief in a Section 220 case should afford to a shareholder the same information regarding the identity of stockholders as the corporation has in its books, records and other papers. See Hatleigh.
That obligation, of course, includes a NOBO list if a corporation has such a list. In order to enforce this obligation recognized in Shamrock Associates, however, and to avoid any possibility of manipulation, it is appropriate in this instance to place Gillette under an order to the effect that, should it hereafter elect to obtain a NOBO list in connection with the forthcoming shareholders meeting, it shall notify plaintiff promptly of that fact and shall supply to plaintiff copies of each such list it receives immediately upon Gillette's receipt of it. Beyond that, however, I cannot conclude that Section 220 creates a right to require the Gillette board to exercise its federal rights under the SEC shareholder communication rules so that plaintiff may have information that the corporation itself does not yet have.
Judgment in conformity with the above shall be entered. Defendant may submit a form of order on notice no later than noon, March 24, 1988.