Chancery Court Holds That Squeezed Out Stockholders Lack Standing to Compel Inspection under DGCL § 220

On February 27, 2017, the Delaware Court of Chancery addressed an important matter of first impression under Delaware law: "Must a plaintiff seeking corporate records under Section 220 of the Delaware General Corporation Law be a stockholder at the time she files her complaint, in order to have standing to pursue the action?"  See Weingarten v. Monster Worldwide, Inc., C.A. No. 12931-VCG (Del. Ch. Feb. 27, 2017).  Vice Chancellor Glasscock answered that question in the affirmative, concluding that "a former stockholder squeezed out in a merger thereafter lacks standing to bring an action under the Statute."  This ruling gives directors a powerful tool to combat efforts by squeezed out stockholders to pursue post-closing breach of fiduciary duty claims.

Background

On August 8, 2016, Randstad North America entered into a merger agreement with Monster Worldwide, which owns and operates the well-known job search website, Monster.com.  Pursuant to the agreement, Randstad agreed to acquire Monster via short form merger at a tender price of $3.40 per share.  On October 19, 2016, one of Monster's stockholders, Joe Weingarten, made a DGCL § 220 books and records demand on Monster's board to investigate alleged wrongdoing by Monster's board members in connection with the merger.  The board rejected Weingarten's demand in its initial form, but expressed willingness to consider a more narrowly tailored production, after which Weingarten requested that the company confirm it would not assert a standing defense to his demand if the parties had not reached agreement on the scope of inspection by the time the merger closed.  Monster did not respond to Weingarten's request for such confirmation by the deadline he imposed.  The merger then closed on November 1, 2016, and, as a result, all of Monster's outstanding stock, including Weingarten's, was canceled and converted into the right to receive cash.  Shortly thereafter, Monster's board advised Weingarten that, because the acquisition had closed, his stated purpose for his § 220 demand had been rendered moot and therefore he lacked standing to continue to pursue his demand.  Weingarten then initiated a lawsuit in the Chancery Court to compel Monster to comply with his § 220 demand. 

The Court's Ruling

Vice Chancellor Glasscock dismissed Weingarten's suit for lack of standing because he was no longer a stockholder of Monster at the time he initiated the lawsuit.  In so holding, the Vice Chancellor pointed to the plain language of DGCL § 220(c), which permits a stockholder whose § 220 demand has been rejected or ignored to file suit in the Court of Chancery to compel inspection, but only if the stockholder has first established, among other things, that "(1) Such stockholder is a stockholder; [and] (2) Such stockholder has complied with this section respecting the form and manner of making demand for inspection of such documents."  According to Vice Chancellor Glasscock, "[b]y requiring that a plaintiff under Section 220, to seek relief from this Court, demonstrate both that it 'has'—past tense—complied with the demand requirement, and that it 'is'—present tense—a stockholder, the legislature has made clear that only those who are stockholders at the time of filing have standing to invoke this Court's assistance under Section 220."

Takeaways

• As a general matter, former stockholders who have been squeezed out in a merger lack standing to compel inspection of the company's books and records under DGCL § 220(c), even where they had made a § 220 demand on the board prior to the merger's closing (when they were still stockholders).

• However, a board may be estopped from asserting such a standing defense if it induced the stockholder into delaying filing an action to compel under § 220(c) until after the merger closed, with the intention of thereby asserting the standing defense.  Vice Chancellor Glasscock explained that, had Weingarten properly invoked equitable estoppel, the court may have been precluded from considering Monster's standing defense.  However, that doctrine requires the misled party to demonstrate that it lacked knowledge or the means of obtaining the truth; it reasonably relied on the conduct of the party against whom estoppel is sought; and it detrimentally changed its position based on that reliance.  Weingarten failed to satisfy these requirements because "there was no 'conduct' by Monster to rely on."  While Weingarten threatened to file suit if Monster did not confirm, by his self-imposed deadline, that it would honor his request not to assert standing as a defense to his demand after the merger closed, Monster did not reply by that deadline and Weingarten chose not to file suit before the closing.  "Under these circumstances," the court explained, "there was no conduct by [Monster] on which [Weingarten] purports to rely, and to the extent [he] relied on Monster's silence, that reliance is not reasonable."