Civil Action No. 7610.
Submitted: August 31, 1984.
Dated: November 7, 1984.
Michael Hanrahan, Esquire, PRICKET, JONES, ELLIOTT, KRISTOL SCHNEE, Attorneys for Plaintiff
A. Gilchrist Sparks, III, MORRIS, NICHOLS, ARSHT TUNNELL, Attorneys for Defendant.
Plaintiff, Radwick Pty., Ltd. ("Radwick") holds 200,000 shares of defendant, Medical Incorporated ("Medical") and brought this action pursuant to 8 Del. C. § 220 to inspect defendant's stockholder lists and certain of its books and records. Although § 220 actions are considered summary proceedings and usually are handled expeditiously, the parties chose to present their positions on a rather expanded record with both preand post-trial briefing followed by oral argument. In light of plaintiff's willingness to conduct this litigation at less than breakneck pace, I am satisfied that the time that has elapsed since submission of this matter does not offend the mandate that this Court provide prompt relief under the statute.
Medical, a Delaware corporation, in a privately held company engaged in the development, manufacture and sale of artificial human implantable organs and physiological support systems. Radwick, a subsidiary of a Western Australian conglomerate known as Bond Corporation Holdings, Ltd. ("Bond"), is a holding company created under the laws of Western Australia to hold Medical stock, among other assets. Radwick acquired its Medical stock in the spring of 1982. Shortly thereafter, James Barris Lepley, Jr. ("Lepley"), Radwick's U.S. financial advisor, made the first of a series of visits to Medical to learn more about the company. Lepley developed a cordial working relationship with Medical's Chief Operating Officer and was given financial information including confidential internal projections of Medical's earnings.
Sometime during the spring of 1983, Radwick became concerned about the dilution of its holdings as a result of private placements being made by Medical. That summer, Radwick learned, through independent sources, that Medical was planning to establish a substantial research facility in Western Australia (the "Western Australian transaction"). Radwick was puzzled or, in Medical's view, distressed, that Medical would undertake a major expansion program in Radwick's "backyard" without discussing its plans with Radwick and seeking the assistance of well placed and influential people connected with Radwick and its parent company.
Early in 1984, when Medical's Chief Operating Officer was in Australia, he met with several of Radwick's directors at their request. At that meeting, Radwick was unsuccessful in its effort to learn more about the Western Australian transaction. In April, 1984 Lepley and two of the three Radwick directors met and decided that a formal demand for information should be addressed to Medical. The demand letter, dated April 12, 1984, requested the following:
(1) Medical, Inc.'s stock ledger and most recent list of stockholders, with names, addresses and number of shares held in each name, including any list of persons holding Medical, Inc. shares in a nominee's name;
(2) A list of Medical, Inc.'s transactions in its own shares or securities convertible into its own shares made within the past 24 months;
(3) Medical, Inc.'s quarterly, annual, and any other financial statements or reports, whether audited or not, prepared within the past 24 months;
(4) Any information or material distributed to any purchasers or potential purchasers of Medical, Inc. shares from the company within the past 24 months;
(5) Any information regarding proposals, negotiations, projections, or other plans in connection with a contemplated transaction by Medical, Inc. in Western Australia.
The stated purpose of the demand was:
. . . to enable Radwick to ascertain the value of its shares, and to communicate with other Medical, Inc. shareholders with respect to the possible purchase by Radwick of additional Medical, Inc. shares or, in the alternative, the possible disposition by Radwick of the shares which it currently owns.
Medical provided the information in categories (2) and (3) of Radwick's demand but refused to produce the remaining documents.
A stockholder seeking books and records of a corporation has the burden of establishing that the demand was made in the form and manner required and that the inspection is sought for a proper purpose — one reasonably related to the stockholder's interest as a stockholder. With respect to a demand for a stockholder list, the burden is on the resisting corporation to establish that the inspection is sought for an improper purpose. 8 Del. C. § 220.
In its answer, Medical denied that the demand letter was authorized by Radwick. The demand letter, dated April 12, 1984, was executed by Radwick's attorney under oath and referred to an attached letter from Radwick's Secretary dated April 3, 1984 (the "authorization letter") as authority for the demand letter. Medical contends that the demand letter exceeds the authorization given to the extent that the demand letter states, as one of Radwick's purposes, the desire to communicate with other Medical stockholders about the possible purchase or sale of their or Radwick's stock. That issue will be discussed in resolving the demand for a stocklist. For present purposes, it is sufficient to note that the demand letter meets the formal requirements as to the form and matter of making demand.
Turning to the demand for books and records, Medical raises three arguments against production of any records in addition to those provided voluntarily: (1) Radwick's true purpose is not to value its shares but to harass Medical; (2) Radwick already has received sufficient information to value its shares; and (3) disclosure of documents relating to the Western Australian transaction may jeopardize sensitive negotiations and thereby harm Medical.
It is settled law in Delaware that valuation of one's shares is a proper purpose for the inspection of corporate books and records. C M M Group, Inc. v. Carroll, Del. Supr., 453 A.2d 792 (1982); Mills v. Fruit Auction Sales Co., Del. Ch., C.A. 6468, Marvel, C. (October 1, 1983); Neely v. Oklahoma Publishing Co., Del. Ch., C.A. 5293, Brown, V.C. (June 30, 1977). Furthermore, once a proper purpose is established, any secondary purpose or ulterior motive is irrelevant. Skouras v. Admirality Enterprises, Inc., Del. Ch., 386 A.2d 674, 678 (1978).
The evidence establishes that, as stated in its demand letter, Radwick seeks the enumerated books and records in order to value its stock. Radwick acknowledges that it has not yet determined whether it will attempt to buy or sell Medical stock and that, depending on the prices offered, it may decide to do nothing. However, the fact that Radwick is holding open these options is only a reflection of the business realities of any possible transaction where the party is not forced to accept the deal regardless of its terms. Lepley testified that Radwick intends to "sit with" its Medical stock only if it is unable to buy or sell at what it determines to be a reasonable price. Trial Transcript p. 89.
Medical argues that the valuation purpose is a pretext. Medical points out that Lepley was hired as Radwick's U.S. financial advisor and that his duties include the valuation of Radwick's investments. Yet Lepley has not been asked to value the Medical stock and his suggestion that Radwick seek Medical information on a friendly and informal basis was rejected. In addition, the evidence suggests that Radwick is interested in finding out as much as it can about the Western Austrialian transaction not only because of its effect on the value of Medical's stock but also because Radwick is curious about Medical's invasion of Radwick's home turf. I am satisfied that Radwick's valuation purpose is bona fide. Radwick's claim is not defeated by the fact that it may have secondary motives which are not reasonably related to its interest as a Medical stockholder.
Although I have concluded that Radwick stated a proper purpose, a question remains as to the specific information Radwick will be permitted to inspect. Where, as here, the purpose is to value the stock of a privately held corporation, only those records which are "essential and sufficient" to perform the valuation must be provided. State ex rel Rogers v. Sherman Oil Co., Del. Super., 117 A. 122 (1922). In deciding the extent of the stockholder's inspection rights, the Court should consider both the information previously provided by the company and the certainty of the stockholder's intention to buy or sell the subject company's stock. Neely v. Oklahoma Publishing Co., supra at p. 7. A stockholder may not use § 220 as a means to invade the corporate board room and inspection rights may be limited where production of certain documents would be adverse to the interests of the corporation. See Skoglund v. Ormand Industries, Inc., Del. Ch., 372 A.2d 204 (1976).
Radwick already has received Medical's annual reports for 1982 and 1983, its quarterly reports for the first three quarters of 1983 and the first two quarters of 1984, a draft confidential private placement memorandum dated January 3, 1982 and various correspondence and memoranda, primarily generated during 1981 and 1982, relating to Medical's operations and financial position as well as a list of Medical's transactions in its own shares during the past two years. Radwick contends that this data, some of which is stale, should be supplemented by the information requested in categories (4) and (5) of the demand letter — private placement materials and documents relating to the Western Australian transaction.
It seems obvious that the private placement information would be of assistance to Radwick in valuing its Medical stock inasmuch as a private placement memorandum is designed to provide information about the company's background and financial prospects for the purpose of attracting a potential investor. However, Medical's expert testified that the information contained in a private placement memorandum is not necessary to do a valuation. In addition, Medical argues that private placement memoranda are confidential and access to those documents would constitute the type of corporate intermeddling that the Neely case found to be inappropriate.
On this issue, I find each side's position to have some merit. It does not follow from the fact that Medical's annual and financial reports are as complete as those of a public company that Radwick should be unable to receive any additional information. On the other hand, a stockholder's demand to obtain confidential information should be closely scrutinized. On balance, I conclude that Radwick should be provided any private placement memoranda actually distributed to potential investors during 1983 and 1984 on the condition that Radwick agree to the same confidentiality terms generally imposed upon a prospective purchaser before being given those documents.
The requested documents relating to the Western Australian transaction raise additional problems. Radwick's interest in this information is understandable. The Western Australian facility may double the size of Medical's operations and undoubtedly is material to Medical's future revenues. In addition, it is natural for Radwick to be curious about a venture that will be undertaken in Radwick's home territory where it and its parent company apparently have great influence and substantial investments of their own. However, this second factor has no relationship to Radwick's interest as a stockholder of Medical.
The Western Australian transaction is still being negotiated, at least in some respects. The very fact that Radwick has been unable to learn very much about Medical's plans through its own sources is evidence of the confidential nature of the negotiations. Moreover, inasmuch as Medical's plans have not been finalized yet, production of the documents relating to the Western Australian transaction would be of limited assistance in valuing Medical stock. Radwick would have to speculate as to what the final arrangements will be and derive a value based on those assumptions.
Radwick has made no definite commitment to buy or sell its Medical stock and is under no particular time constraint in making that decision. Medical, by contrast, is in the midst of sensitive negotiations which they fear may be disrupted if Radwick is brought into the picture. Considering all of these factors, I am satisfied that the potential benefit to Radwick in performing a stock valuation is outweighed by the potential harm to Medical of untimely disclosure of confidential information about a pending transaction. Accordingly, the documents sought in category (5) relating to the Western Australian transaction are not required to be produced.
As noted earlier, Medical contends that Radwick's demand for a stock list is deficient because the purpose of communicating with stockholders about the purchase or sale of Medical stock was not included as a purpose in Radwick's authorization letter. Medical also argues that (1) such a communication purpose is speculative and premature and (2) to the extent that the stocklist is being sought as part of Radwick's valuation purpose, the evidence demonstrates that the stocklist will not assist Radwick in valuing its Medical stock.
I find Medical's technical objection to be without merit. The authorization letter specifically identifies Medical's stocklist as one of the desired documents and refers generally to Radwick's interest in purchasing additional stock from Medical's existing stockholders. Lepley testified:
We wanted to communicate with the shareholders, the other shareholders of Medical, Inc. to review with them what their view of the company was to help us establish a value for the company. . . . We wanted to talk to them about at what prices they might be willing to sell their shares, or at what prices they might like to buy our shares.
And further, as I think I've stated before, we would like to know who the shareholders are because it might have a substantial effect on our views as to whether or not we should — how we should value the shares. Trial Transcript p. 57.
Although the authorization letter did not explictly address the communication purpose, the trial testimony establishes that Radwick did, in fact, authorize its counsel to seek the stocklist for the purpose stated in the demand letter.
Medical relies upon several recent decisions for the proposition that a stocklist demand is insufficient where the substance of the intended communication with the company's stockholder is not explicity stated and there is no impending event which would, by inference, indicate the nature of the intended communication. See Hatleigh Corporation v. Lane Bryant, Inc., Del. Ch., C.A. No. 6259, Hartnett, V.C. (October 20, 1980); Haber v. Harnischfeger Corp., Del. Ch., C.A. No. 6930, Hartnett, V.C. (February 3, 1983); Shamrock Associates v. The Dorsey Corporation, C.A. No. 7678, Brown, C. (July 24, 1984). However, those cases are distinguishable on their facts. The demands in Hatleigh and Shamrock involved communication with stockholders about possible representation on the board of directors and the purpose in the Haber demand was to communicate about the affairs of the corporation and, possibly, remedies available to the company's stockholders. Radwick's communication purpose, by contrast, is to buy or sell Medical stock. This Court has found such a purpose to be proper, Mite Corporation v. Heli-Coil Corporation, Del. Ch., 256 A.2d 855 (1969), even where the stockholder's plan to purchase or sell is tentative. Bethlehem Copper Corporation v. Valley Camp Coal Company, Del. Ch., C.A. 4942, Quillen, C. (December 14, 1975).
The reference in the Radwick demand letter to the possible purchase or disposition of Medical stock does raise a question as to whether the stocklist demand is premature. However, paragraph 9 of the complaint as well as the trial testimony establishes that Radwick does intend to change its Medical holdings. Accordingly, I find that Radwick has stated a proper purpose for inspection of the stocklist.
In light of the limited number of documents to be produced pursuant to this decision, it seems reasonable to require that Radwick be given access to those documents no later than the close of business on Tuesday, November 13, 1984.
IT IS SO ORDERED.