Judicial Rewriting of Inspection Rights: Wolst v. Monster Beverage Corp. (Part 2)
We are discussing Wolst v. Monster Beverage Co., a case brought under DGCL 220.
The case arose out of insider trading allegations that occurred in 2007. A derivative action over the behavior was filed in 2008 and a shareholder ("Shareholder") intervened. The action was dismissed in 2011 for the failure to establish demand futility. In 2012, Shareholder demanded the board "(i) investigate possible violations of law; and (ii) commence a civil action against the officers of the Company for the misconduct identified." Verified Complaint, at 20.
The board then formed a special committee. On October 19, 2012, Shareholder was notified that her demand had been rejected. In March 2013, Shareholder filed a request for inspection. The purpose was identified as:
- (1) “[e]valuating the Board's refusal to act on [her] litigation demand and whether that refusal constituted a reasonable and good-faith exercise of the Board's business judgment” and (2) “[e]valuating the process by which the Board decided to refuse to act on [her] litigation demand.”
In effect Shareholder wanted documents to determine whether the board had an adequate basis for refusing her demand. As part of that, Shareholder presumably expected to obtain information on the investigation into the alleged misbehavior, thus allowing her to determine the steps taken by the board other than the refusal to engage in litigation.
Of course, one result was the possibility that Shareholder would file suit to challenge the decision to refuse the litigation demand. Indeed, Shareholder conceded “that her ultimate goal in pursuing her books and records request is ‘to determine whether there is a basis to bring a derivative suit’ based on the ‘wrongs alleged in’ the earlier derivative action.” The court described the “end game” as a derivative suit.
The company asserted that any derivative claim based upon the allegations from 2007 were barred by the statute of limitations. Such a defense did not automatically bar an inspection. As the court noted:
- A potentially viable affirmative defense to an anticipated derivative claim will not necessarily defeat a books and records effort. Sometimes developing the record to withstand possible affirmative defenses requires more effort than is practicable for a books and records action. Sometimes conduct that cannot be challenged because of a time-barr defense can, nevertheless, inform consideration of other potentially wrongful conduct that is not yet time-barred.
Nonetheless, this is not always the case.
- There is, however, “the possibility that, in a specific factual setting, a time bar defense . . . would eviscerate any showing that might otherwise be made in an effort to establish a proper shareholder purpose.” The challenged trading activities occurred in 2006 and 2007. [Shareholder] does not identify any more recent potentially wrongful conduct that could provide a basis for a derivative action. Without some elaboration upon what she would do with the requested books and records in her capacity as a stockholder, the burden of producing books and records that Section 220 imposes upon the corporation should be avoided in this instance. In sum, consideration of a time-bar defense to the contemplated derivative action is appropriate in this “specific factual setting.”
Shareholder challenged the court's decision to resolve the statute of limitations issues (resolving such issues as the application of laches) in a 220 hearing. Nonetheless, the court found the statute of limitations applied and, therefore, Shareholder lacked a proper purpose.
Primary materials on this case, including the opinion of the Vice Chancellor, can be found at the DU Corporate Governance web site.