IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
FRANZ-JOSEF KORTUM and
WEBASTO AG FAHRZEUGTECHNIK,
Plaintiffs,
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V.
Civil Action No. 17237
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WEBASTO SUNROOFS INC., a
Delaware corporation,
Defendant.
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OPINION
Date Submitted:
Date Decided:
October 15, 1999
February 9,200O
Michael D. Goldman, James F. Burnett, and Eileen M. Filliben, Esquires, of POTTER,
ANDERSON & CORROON, Wilmington, Delaware; and. Lawrence D. Pringle and
James V. Parravani, Esquires, of DORSEY & WHITNEY LLP, New York, New York;
Attorneys for Plaintiffs
Samuel A. Nolen, Catherine G. Dearlove, Megan Semple Greenberg and Kelly A.
Herring, Esquires, of RICHARDS, LAYTON & FINGER, Wilmington, Delaware;
Attorneys for Defendant
JACOBS, VICE CHANCELLOR
This action is brought by a director and a 50% stockholder of a joint venture
Delaware corporation to inspect the corporation’s books and records under 8 Del.
C. $220. Two issues are presented. The first is whether the inspection rights of
the director -- which otherwise are conceded to be absolute -- may be limited by
ordering the director not to disclose those records (or information derived
therefrom) to the 50% stockholder that designated the dirlector as a board member.
The second issue is whether the plaintiff stockholder’s stated purpose for
inspection is bona fide, and if so, whether the scope of inspection relief should be
limited because of the possibility of conflicting interests between that 50%
stockholder and the corporation. I conclude, in this post-trial Opinion, that (1) the
plaintiff-director’s inspection rights should be unrestricted, and (2) that the
plaintiff-stockholder, whose purpose for seeking inspection is bona fide, should
have the same inspection rights as its director-designee, but subject to certain
limiting conditions applicable to both plaintiffs.
I. FACTS
Many of the facts critical to a resolution of this controversy are undisputed,
but where they are disputed the facts are as found below.’
‘The factual summary narrated in this portion of the Opinion is not intended to be
exhaustive. Other facts are set forth in the Analysis Section (Part III), where appropriate.
A. The Parties and their Relationships
The Delaware corporation that is the subject of this dispute is Webasto
Sunroofs, Inc. (“WSI”), a company that is engaged in the business of
manufacturing, marketing, selling, and distributing sunroofs to the automotive
industry in North America. WSI is a joint venture formed under a shareholders
agreement dated May 1, 1984 (the “Shareholders AgreemLent”) between plaintiff
Webasto AG Fahrzeugtechnik (“WAG”) and a subsidiary of Magna International,
Inc.(“Magna”).2 WSI employs approximately 900 people and in 1998 it had net
sales of approximately $20 1 million.
WAG and Magna each owns 50% of the equity of WSI, and each
stockholder designates three of WSI’s six directors. One of WAG’s directordesignees is plaintiff Franz-Joseph Korttim (“Korttim”), who is WAG’s Chief
Executive Officer. WAG and Korttim are the plaintiffs in this action. The
defendant is WSI, but only nominally. The true respondent is Magna, the other
50% stockholder that controls WSI on a day-to-day basis and that is presently
embroiled in this dispute with WAG.
*The Magna subsidiary is Cosma International of America, Inc. (“Cosma”). Except where
otherwise stated, Magna and Cosma are referred to in this Opinion as “Magna,” and any
references to Magna include Cosma.
2
The Shareholders Agreement governs the relationship between the two
stockholders. Under that Agreement, WAG is to provide technical support to WSI
in accordance with certain license agreements, and Magna is to provide
management services under a management agreement dated as of August 1, 1984
(“Management Agreement”).3 Under the Management AgTeement, Magna has
been exercising day-to-day control over WSI’s operations, and is presently
exercising control over WSI’s position in this litigation.4 But, and as WSI (Magna)
concedes in its brief, for the last fifteen years WAG, through its directordesignees, has “participate[d] in decision making regarding the operation, strategy
and financial condition of WSI.“’ The record shows that significant financial and
other information has been routinely fin-nished to WAG and Magna. WAG
contends, however, that much of that information is not provided to it on a regular
basis or in the same detail as is provided to Magna. What is clear is that Magna,
30n July 1, 1998, Magna’s rights and responsibilities under the Management Agreement
were assigned to a subsidiary, Atoma International Corp. (“Atoma”). Again for ease of reference,
unless otherwise noted, any references to Magna should be understood as including Atoma.
4The response to plaintiffs’ demand letter of May 3 1, 1999 ‘was signed by Atoma, as
“agent” for WSI; moreover, WSI is represented in this proceeding by the same counsel that
represents Magna in a pending proceeding filed by WAG to dissolve WSI pursuant to 8 Del. C.
$273. To signal the fact that the litigating positions being taken by WSI are in reality positions
taken by Magna, WSI is sometimes referred to in this Opinion as “WSI (Magna).”
5WSI Answering Post-Trial Brief at 5.
3
by virtue of its day-to-day control of WSI, controls access to those books and
records and is now using that control to deny similar access to the other 50%
stockholder and co-venturer, WAG. That denial of access is what has prompted
the institution of this $220 proceeding.
B. Events Leading to the
Demand for Inspection
Although WAG’s motives for seeking inspection of WSI’s books and
records are disputed, the underlying background facts are not. Until 1998 the two
co-venturers’ relationship was more or less harmonious. In 1998 two events
occurred, and from that point on the relationship between WAG and Magna
deteriorated. The first event was Mr. Kortiim’s ascendancy as CEO of WAG and
his insistence upon more adequate reporting of information to WAG. The second
was WSI’s 1998 year end reported profits of only $2.1 million --a 90% downward
variance from the $21 million in profits that WSI had previously budgeted.
Concerned about that development, Horst Winter, Executive President of WAG
and a director of WSI, wrote WSI a letter requesting detailed explanations for that
downward variance. That letter was hand delivered at a meeting between Magna
and WAG representatives held in Munich, Germany, in February, 1999. At that
meeting, Korttim stated that he and WAG were dissatisfied with the quality of
4
WSI’s financial reporting and its explanation for the variances, and took the
position that more detailed explanations were required. At that meeting Magna
representatives responded that the books of WSI were fully open to WAG at any
time, and they agreed to let WAG conduct an audit of WSI. Shortly thereafter,
while WAG was arranging with Magna to conduct the audit, WAG was told that
Magna would not allow the audit to take place.
Magna (through WSI) does not deny that these events occurred, but
contends that WAG’s claimed need for more information was and is pretextual.
WAG’s real purpose, Magna claims, is to compete directly against WSI in the
North American sunroof market, free of any constraints imposed by the joint
venture or the Shareholders Agreement. Magna points to several facts that, it
claims, compel this conclusion. First, WAG acquired and operates Hollandia
Sunroofs, Inc. (“Hollandia”), which markets and distributes sunroofs in the
aftermarket industry in the United States. Second, WAG formed a new
corporation (Webasto Roof and Body Systems of Lapeer,, Michigan) to offer
services, products, and engineering technology to its customers in North America.
Third, WAG is currently distributing and selling sunroof products (including
lamella sunroofs) in North America. Fourth, WAG has excluded WSI from
preparing quotations to develop new business from General Motors and Daimler
5
Chrysler. Fifth, and most important, on May 19, 1999, WAG filed an action in this
Court under 8 Del. C. $ 273 to discontinue WSI (the “Section 273 action”), in
which WAG has proposed a plan of discontinuance and a distribution of WSI’s
assets.6 The Section 273 action is being actively prosecuted.
On May 3 1, 1999, two weeks after WAG filed the Section 273 action, Mr.
Korttim sent a letter to WSI, pursuant to 9220, in both his capacities as a director
of WSI and as Chairman of WAG, demanding to inspect ‘WSI’s books and records,
Korttim’s stated purpose as a director for seeking inspecuon was to monitor
Magna’s performance under the Management Agreement, especially in light of the
recent profit variances. WAG’s stated purpose as a stockholder was to value its
shareholder interest in WS17 It is undisputed that the scope of the requested
document inspection is quite broad.*
6The Section 273 action is docketed as In Re Webasto Sunroofs. Inc., Del. Ch., C.A. No.
17171.
7An additional purpose that WAG relies upon is that it was Iconsidering financing options,
including a public bond issuance, which require an accurate determination of the value of all its
assets and investments. That purpose, Magna claims, is personal to WAG and not reasonably
related to its interest as a stockholder. a, Thomas & Betts Cornv. Leviton Mfg. Co., Del. Ch.,
685 A.2d 702,708-10 (1995), affd, Del. Supr., 681 A.2d 1026,10:33 (1996). Because I find that
WAG’s stated (valuation) purpose is bona fide, and determine the scope-of-inspection question
on that basis, I do not reach or consider the issue relating to WAG’s second purpose.
8The demand embraces all WSI books and records, including, but not limited to, the
following nine categories: (1) all sales records underlying WSI’s audited financial statements; (2)
all documents reflecting the nature and value of WSI’s assets, including, but not limited to,
accounts receivable, inventories of finished goods, raw materials and work in progress, records
6
WAG contends that it submitted the May 3 1 demand letter in response to
Magna having reneged on its undertaking to permit WAG to conduct an audit.
Magna (WSI) responds that the demand letter, and this action, are simply a part of
WAG’s “exit strategy” from the joint venture, and a strategem to enable WAG to
obtain sensitive information that WAG will use competitively to WSI’s
disadvantage. In any event, in response to the demand letter WSI agreed to permit
the inspection by Kortim in his capacity as a director, subject to his written
confirmation that he and any advisors would inspect and use the books and
records only in that capacity; &, he would not disclose them to WAG or to any
other third parties. WSI declined, however, to permit any books and records
inspection by WAG, citing as reasons WAG’s competitive status, the nature of the
information WAG was demanding, and the pendency of the Section 273 action.g
This proceeding followed. A trial was held on August 4 and August 26,
of WSI property, plant and equipment holdings, records of cash on hand, cash equivalents and
other investments, and records of any other WSI assets; (3) records of all WSI obligations and
liabilities; (4) all supply contracts, tooling contracts or any other WSI contracts with third-party
vendors and/or related entities; (6) all sales projections and/or business plans prepared or
reviewed by WSI management; (7) any other financial records of WSI; (8) all information
concerning employees of WSI, including, but not limited to, employment contracts, any
employee benefit plans or other individual benefit plans, stock opti’on plans, etc.; and (9) any tax
balance sheets, tax returns and tax assessments for the last three years and latest WSI tax auditors
reports. PX5.
9PX6.
7
1999, followed by post-trial briefing and oral argument. This is the Opinion of the
Court on the merits of the inspection claims.
II. THE CONTENTIONS AND
THE APPLICABLE LAW
This action involves two separate inspection claims: Korttim’s claim for
inspection in his capacity as a WSI director, and WAG’s claim for inspection as
one of WSI’s two 50% stockholders. Those claims implicate separate rights that
arise out of two distinct provisions of 5220 of the Delawa.re General Corporation
Law, provisions that impose different burdens of proof.
A. Director’s Inspection Rights
Regarding the inspection rights of a director, 5220 (d) provides that “[alny
director...shall have the right to examine the corporation’s stock ledger, a list of its
stockholders and its other books and records for a purpose reasonably related to
the director’s position as a director.” Once the director makes a $220 demand that
is refused, a prima facie showing of entitlement to the documents has been made
and the burden shifts to the corporation to show why inspection should be denied
or conditioned.” As Vice Chancellor Lamb has stated, there is a “presumption
‘OIntrieri v. Avatex, Del. Ch., C.A. No. 16335, Lamb, V.C., Ltr. Op. at 1 (June 12, 1998)
(citing Holdtiewe v. The Nostalgia Network. Inc., Del. Ch., C.A. No. 12914, Allen, C., Mem.
Op. at 5-6 (Apr. 29, 1993), Mem. Op. at 5-6 (quoting Henshaw v. American Cement Corn., Del.
Ch., 252 A.2d 125, 128-29 (1969)).
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that a sitting director is entitled to unfettered access to the books and records of
the corporation for which he sits and certainly is entitled to receive what the other
directors are given.“”
In apparent recognition of the broad scope of a director’s statutory
inspection right, WSI (Magna) conceded in its response to the demand that
Korttim, in his directorial capacity, was entitled to inspect all the documents
described in his demand letter. WSI contends, however, that it is entitled to
impose conditions that (it asserts) will assure that the inspection will be only in
Korttim’s directorial capacity. Specifically, in its response to the demand letter,
Magna imposed the following restrictions on Mr. KortiimL)s inspection:
.
a requirement that other persons who will as,sist in the inspection be
identitied at least three business days in advance;
.
a limitation on other participants to “only those persons who
represent you personally in such capacity, and who do not have any
other interest or representation which may conflict with the interests
of WSI. . .;
.
a requirement that Korttim sign a confirmation that he would be
inspecting and using WSI documents only in his capacity as a WSI
“Intrieri at 1; see also, Milstein v. DEC Insurance Brokeras;e Corp., Del. Ch., C.A. Nos.
17586 and 17587, Lamb, V.C., Bench Ruling Tr. at 3 (Feb 1,200O:) (expressing the “view that
the right of a director of a Delaware corporation to inspect, have access to the books and records
of the corporation, as quite broad. It has been described by me, and I think others, as essentially
unfettered in nature...[but]...is limited in the sense that...the request for information must be for a
purpose that is...reasonably related to the director’s position as a director.“)
9
director, and that any other person who assists in the inspection sign a
similar confirmation; and
.
an agreement that, by inspecting the docume:nts, Mr. Kortiim would
not disclose the information to any third parties, including any
competitor or potential competitor, and WAG itself.12
Magna also reserved the right to decide what documents Korttim could
COPYAccordingly, the only issue presented with respect to Korttim’s claimed
directorial inspection right is whether any or all of the conditions that Magna
seeks to impose are reasonable. l3 I conclude, for the reasons discussed in Part III,
infi-a, that with one exception, they are not.
“PX 6.
r3Although WSI (Magna) conceded Kortiim’s entitlement to inspect its books and records
subject to the above conditions, in its post-trial brief WSI reneged on that concession by arguing
that Korttim’s stated purpose is not genuine and that his true purpose is both improper and
adverse to WSI’s interests. That argument is untenable, both legally and factually. Legally,
Magna is bound by its concession concerning Kortiim’s inspection entitlement, and cannot now
be heard to repudiate it. Factually, Magna’s argument improperly attempts to attribute WAG’s
allegedly improper purpose to Mr. Kortilm, acting in his capacity as a director. The record
shows, however, that Korttim’s stated inspection purpose is to monitor Magna’s management
performance. Given the 90% gap between budgeted and actual 1998 earnings that occurred under
Magna’s stewardship, that purpose is credible. WSI (Magna) concedes that “[tlhrough its
designees on the board, WAG participates in decision making regarding the operation, strategy
and financial condition of WSI.” Def. Ans. Br. at 5. WSI does not explain, however, how
Kortiim, or for that matter any WSI director, can make informed decisions on such critical
matters without access to WSI’s corporate books and records. Accordingly, the only real issue to
be decided in connection with Korttim’s inspection right is whether that right is properly
subjected to one or more of the conditions that WSI (Magna) seeks to impose.
10
2. Shareholder’s Inspection Rights
The inspection rights of a shareholder are governed by 8 Del. C. $ 220 (c),
which pertinently provides:
Where the stockholder seeks to inspect the corporation’s
books and records, other than its stock ledger or list of
stockholders, such stockholder shall first establish (1)
that such stockholder has complied with this section
regarding the form and manner of making demand for
inspection of such documents; and (2) that the inspection
such stockholder seeks is for a proper purpose....
Thus, unlike the case of a director seeking inspection, a stockholder who
seeks inspection under 3 220 must prove by a preponderance of the evidence: (a)
its compliance with the form and manner of making a demand specified in the
statute, and (b) the propriety of its purpose for seeking inspection, i.e., that the
purpose is reasonably related to its interest as a stockhoMer. Once the shareholder
demonstrates its entitlement to inspection, it must also show that the scope of the
requested inspection is proper, ti-., that the books and reciords sought are
“essential and sufficient” to the shareholder’s stated purpose.14
In this case WSI contends that WAG has failed to meet its burden in all
three respects. That is, WSI argues that (i) WAG did not submit a demand in
14Helmsman Manaeement Servs.. Inc. v. A&S Consultants,J&, Del. Ch., 525 A.2d 160,
168 (1987); Thomas & Betts Corn. v. Leviton Mfp. Co., afrd, Del.. Supr., 681 A.2d 1026, 1035
(1996) (citing Helmsman).
11
conformity with the “form and manner” required by the statute, because the
demand was not “under oath;” (ii) WAG’s stated purpose is not factually bona
tl&, because given the volume and kinds of documents it has already received and
because it has no present ability or intent to buy Magna’s shares or sell its shares,
WAG has no need to inspect WSI’s books and records to value its investment.
Indeed, Magna argues, WAG’s stated purpose is pretext&, since its true objective
is to garner as much sensitive, proprietary information as it can to enable it to
compete with WSI once the joint venture is dissolved. Finally, WSI (Magna)
argues that (iii) inspection would harm WSI and therefore should be denied, but
even if WAG can establish its entitlement to inspection, WAG has failed to show
that any of the broad categories of documents it seeks to inspect is “essential and
sufficient” to its stated purpose of valuing its investment.
These contentions present three issues relating to WAG’s inspection rights
as a shareholder:
(1) Did WAG submit a demand “under oath” as required by the statute?
(2) Has WAG shown that its stated valuation purpose is, in fact, its true
purpose,? and
(3) Has WAG shown that the scope of the inspection it seeks is proper?
For the reasons next discussed, I conclude that WAG’s demand was “under
12
oath” within the meaning of the statute, and that its stated valuation purpose is, in
fact, its true purpose. I also conclude that Korttim is entitled to inspect all of the
document categories described in the demand, and may disclose those documents
to WAG, subject to certain conditions. Accordingly, it becomes unnecessary to,
and I therefore do not, reach the issue of whether the documents described in the
demand are “essential and sufficient” to WAG’s purpose.
III. ANALYSIS
A. Kortilm’s Director Inspection Claim
As previously noted, because WSI (Magna) has conceded that Korttim, as a
director, is entitled to inspect all the books and records listed in the demand letter
subject to certain limitations, the only issue present is whether WSI’s proposed
limitations are warranted. I conclude that they are not.
Restrictions on Korttim’s choice of agents to assist him in the inspection
might be justified if the proposed agents have interests in conflict with WSI.”
Magna (WSI) has the burden of demonstrating such a conflict, and has not met
ISSee Henshaw v. American Cement Corn., 252 A.2d at 125; Holdmeiwe at 5-7. WSI
(Magna) argues that these decisions warrant restrictions on Korttim’s choice of agents, but in
those cases the agents themselves had conflicts of interest and were actively pursuing activities
hostile to the corporation, i.e., a law firm representing individuals who were suing the company
and a third party, not otherwise entitled to receive information, actively involved with the
company, respectively.
13
that burden. The agents Korttim anticipates using include lawyers, accountants,
members of WAG’s finance staff, and Horst Winter, who is a director of WSI.
None of these agents was shown to be engaging (or preparing to engage) in
activities hostile to WSI. Moreover, Magna’s claim that WAG is engaged in a
campaign to compete with, and thereby harm, WSI, is undercut by the fact that
WAG’s 50% stock interest in WSI represents 20% of WAG’s revenues and 25%
of its profits.
Nor is it reasonable to condition Korttim’s inspection upon an undertaking
not to disclose to WAG any information gleaned from the document inspection.
Kortiim is a fiduciary of WSI, but he is a fiduciary of WAG as well. Absent a
conflict between those two roles, Kortiim’s fiduciary duty would require him to
disclose that information to WAG, which is one of WSI’s 50% owners. As Vice
Chancellor Lamb has stated, “. . .the Court has the power and the discretion to
limit [a] director’s access to information, but that is a discretion that I would
sparingly exercise because, frankly, [the Court is] not the fiduciary charged with
duties to the corporation and its stockholders; rather, the director is.“16
Magna has not established a conflict between Korttim’s two fiduciary roles.
16Milstein at 4.
14
Although it claims that WAG intends to compete with WSI in North America to
the greatest extent possible, the only evidence of any actual competition with WSI
is that Hollandia currently competes in the aftermarket segment -- a fact
acknowledged by Mr. Korttim, who testified that no information received as a
result of this proceeding will be shared with Hollandia. With that exception,
Magna’s other evidence of “competitive threat” is speculative and unpersuasive.
That evidence concerns activities that were not the subject of any protest by
or dispute with Magna, until WAG filed the Section 273 dissolution action. Such
activities may threaten competition with hilagna, but not necessarily with WSI. At
most Magna has shown that WAG has the infrastructure and potential to compete
with WSI in the OEM market at some point in the future. And while that might
ultimately occur if WAG prevails in the Section 273 action, that possibility does
not prove that WAG is threatening to do so now, or that Magna may justifiably
use its day-to-day control over WSI to prevent Korttim from disclosing the results
of his inspection to WAG.17 For the same reason, WSI’s (Magna’s) attempt to
17Magna’s insistence that Korttim not disclose any information obtained as a result of the
inspection to other third parties including other potential competitors, is not unreasonable on its
face. I perceive no reason why Korttim would object to such a condlition, so long as the
nondisclosure obligation does not include WAG or its representatives. Because Magna has not
shown any risk that Korttim intends to disclose the information to anyone other than WAG,
however, it must be presumed that Korttim, as a fiduciary of WSI, will not disclose WSI’s
proprietary or confidential information to such third parties. Therefore, Korttim is encouraged,
15
limit Korttim’s statutory right to make copies of inspected documents is also
unwarranted.
Accordingly, Mr. Korttim’s inspection rights shall be unrestricted, except
for the self-imposed restriction that no information derived from the inspection
will be shared with Hollandia.
B. WAG’s Shareholder Inspection Claim
As earlier noted, WSI (Magna) opposes WAG’s inspection claim on the
grounds that (i) the demand was not under oath as the statute requires; (ii) WAG
has not shown that its stated purpose is, in fact, its true purpose; (iii) WAG has not
demonstrated that the broad categories of documents WAG seeks to inspect are
“essential and sufficient” to its purpose; and (iv) if inspection is allowed, its scope
should be limited to protect WSI against competitive harm threatened by WAG.
Because the Court has already determined that Korttim is entitled to inspect
the universe of books and records described in the demand and should not be
restricted from disclosing those documents (or resulting information) to WAG,
that determination obviates the need to determine whether the documents to be
inspected are “essential and sufficient” to achieve WAG’s purpose. Consequently,
but will not be required, to bind himself to that nondisclosure restriction.
16
the issues are whether (1) WAG is entitled to inspection relief (specifically,
whether the form of its demand is proper and its stated purpose is bona fide), and
(2) whether WAG’s inspection rights (which would otherwise be coextensive with
Korttim’s) should be restricted, and if so, to what extent.
1. The Form-of-Demand Issue
I first address WSI (Magna’s) argument that the de:mand was not “under
oath.”
Section 220(b) requires that a stockholder seeking :inspection must submit
to the corporation a “written demand under oath.” WSI contends that the written
demand submitted by plaintiffs was not “under oath,” because under German law
the form of notarization utilized in the demand did not constitute an oath.
During the trial I found that the argument had no merit. Nothing contained
in WSI (Magna’s) post-trial brief alters that conclusion. On its face the
notarization of Mr. Kortiim’s signature on the demand shows that the demand was
“under oath.” The notarization recites as follows:
Subscribed and sworn to me the undersigned Dr. Eberhard
Hatzelmann, Richter am Oberlandesgericht a. D., amtlich
besteller Vertreter von Dr. Helmut Gabhard, Notar in
Starnberg, this 28th day of May 1999
[SEAL]
Notary Public
17
The second page of the notarization recites:
I hereby certify that this document was signed in my
Presence by Mr. Franz-Josef Kortiim, of Kraillinger
StraBe 5, D-82 13 1 Stockdorf, identified by his official
identity card. . . . .I8
On its face the quoted acknowledgment appears to 4conform to the
requirement that the demand be under oath. The acknowledgment evidences that
the demand was signed by Korttim, whose identity as the signatory is verified, and
that the demand was “sworn to and subscribed” before the attesting notary.
Nonetheless, at the trial and for the first time in the case, ‘WSI (Magna) took the
position that the notarization was insufficient to constitute an “oath” under
German law.19 WSI offered into evidence an affidavit to that effect, which the
Court excluded on the grounds that (i) WSI had failed to give notice of its intent to
rely on proof of foreign law as required by D.R.E. 202 (e), and (ii) if there was a
formal defect, it was cured because Mr. Korttim testified that the statements made
in his demand were true and correct.20
‘*PX 5 (underscoring added).
191n its letter responding to the demand for inspection, WSI did not object to the form of
the demand; i.e., it did not state that the demand was formally defective because it was not under
oath. PX 6. The plaintiffs were never put on notice that WSI would take this position until the
trial.
*OTr. 343, Moreover, on August 26, the plaintiffs filed an amended demand; i.e., the
identical demand previously submitted, but with a new notarization in the form customarily used
18
I conclude that the original demand, while not in the customary form,
satisfied the requirements of $220 (b). But even if that conclusion is erroneous,
any defect was cured by Korttim’s trial testimony. Accordingly, WSI’s objection
to the form of the demand is without merit.
2. The Bona Fides of WAG’s
Stated Inspection Purpose
WSI (Magna) next challenges the I
bona tides of WAG’s stated purpose. n
its demand letter, WAG stated that its purpose for seeking inspection was “to
determine the value of its shareholding interest in WSI.” Ilt is well established that
the purpose of valuing one’s shares in the corporation is proper under §220.21 In
these circumstances the genuineness of that purpose appears self-evident. WAG is
a 50% stockholder in a joint venture corporation owned bly only one other 50%
stockholder. The relationship between those two stockhol.ders is antagonistic, and
one of them (WAG) has filed a petition under Section 273 to dissolve the
corporation. As part of the Section 273 action, WAG has proposed a plan to
in these proceedings. See PX 41.
*‘See. e.g,, CM&M Group. Inc. v. Carroll, Del. Supr., 453 A.2d 788, 792-93 (1982);
Helmsman Management, 525 A.2d at 165; Ostrow v. Bonney Forg: Corp., Del. Ch., C.A. No.
13270, Allen, C., Mem. Op. at 28 (Apr. 6, 1994).
19
liquidate WSI’s assets in a private auction limited to the two 50% ownersz2 In its
response to WAG’s petition, Magna (through its subsidiary, Cosma) asks the
Court to dismiss the petition or, alternatively, to conduct a public auction to sell
all of WSI’s outstanding shares.23
Thus, if the Section 273 action proceeds to a conclusion, it is possible that:
(1) WSI’s assets will be sold to one or perhaps to both stolckholders, or (2) all of
WSI’s outstanding shares will be sold at a public auction. If, however, the Section
273 proceeding is dismissed, WAG would have a strong interest in either selling
its WSI shares to Magna or buying Magna’s WSI shares. Under any scenario
WAG would have a need to value its investment to enable it to make an informed
judgment about how much to bid for WSI’s assets, or for Magna’s WSI shares,24
or about the price at which WAG should sell its WSI shares. I find that WAG’s
interest in valuing its WSI shares based on accurate information is both genuine
and substantial: WAG’s investment in WSI represents 20% of its revenues and
25% of its profits. Whether dissolved or not, WSI will not continue as a joint
221n Re Webasto Sunroofs. Inc., Del. Ch., C.A. No. 17171, Petition for Discontinuance of
Corporation and Plan of Distribution; See DX 21.
23kJ. (Response to Petition for Discontinuance and Exhibit 13 thereto).
241ndeed at the February 22, 1999 meeting in Munich, WAG expressed an interest in
purchasing Magka’s 50% interest in WSI. PX 3 at WSIOO0146.
20
venture between Magna and WAG.
WSI (Magna) contends, however, that WAG’s stated purpose in seeking
inspection is not its true purpose because there is no immment opportunity for
WAG to exit its investment.25 But the fact that no specific offer to purchase or sell
is pending at this moment, or that WAG has not yet decided whether (or not) to
purchase or sell, do not -- alone and without more -- defeat the factual bona tides
of its valuation purpose. As this Court stated in IIelmsman Management Services,
Inc. v. A&S Consultants. Inc.:26
When a minority stockholder in a closely he1.d
corporation whose stock is not publicly traded
needs to value his or her own shares in order to
decide whether to sell them [and if so, for holw
much], normally the only way to accomplish that
is by examining the appropriate corporate books
and records.
That reasoning has additional force where, as here, the shareholder seeking
inspection is a 50% owner of the non-publicly held corporation.27 That fact is of
25WSI simultaneously (and somewhat inconsistently) argues that this 0 220 proceeding is
a part of WAG’s covert “exit strategy.” & Def. Ans. Br. at 2, 21-22.
26525 A.2d at 165.
27WSI also argues that WAG has already performed a preliminary valuation of its
investment, which shows that WAG’s stated valuation purpose is pretextual. The argument is
unpersuasive, because the preliminary valuation, based on less than complete information,
buttresses the credibility of WAG’s claimed need to do a more reliable valuation. & Thomas &
Betts Corn., 685 A.2d at 713; (shareholder’s ability to perform a preliminary valuation based on
21
importance because it matters greatly if the stockholder seeking inspection owns
100 shares in General Motors or owns 50% of the shares of a private corporation
held by two stockholders. In the latter case, there often is no identifiable corporate
interest separate and apart from the interests of the two stockholders or if there
is, the interest of the corporation in protecting itself from unwarranted intrusion is
considerably diminished. For that reason, in cases such as this, there should be a
rebuttable presumption that the 50% shareholder’s purpose for seeking inspection
is valid. In this case, however, the evidence demonstrates the propriety of WAG’s
purpose with or without a presumption,
WSI argues that WAG’s status as an actual or potential competitor also
belies its professed valuation purpose. In this case that argument is, factually and
legally incorrect. A stockholder’s status as a competitor may limit the scope of, or
require imposing conditions upon, inspection relief, but that status does not defeat
the shareholder’s legal entitlement to relief2*
Finally, WSI argues that the pendency of the Section 273 proceeding
incomplete information does not warrant denial of inspection of boloks and records to value
shares).
28See e.p., E.L. Bruce Co. v. State ex. rel. Gilbert., Del. Supr., 144 A.2d 533 (1958);
Credit Bureau of St. Paul. Inc. v. Credit Bureau Reports. Inc., Del. Ch., 290 A.2d 689 (1972);
Safecard Servs.. Inc. v. Credit Card Serv. Corp., Del. Ch., CA. No. 6426, Walsh, V.C. (Sept. 5,
1984).
22
defeats WAG’s inspection right. That also is incorrect. So long as the statutory
requirements for inspection relief are satisfied, the mere pendency of another
proceeding does not disqualify a party involved in the other lawsuit from
inspecting the corporation’s books and records.29 Nor does the possibility that the
Section 273 action may result in a public auction disqualify that party. WSI
(Magna) argues that if inspection is allowed, WAG will have access to WSI’s
competitive secrets, which would eliminate any incentives for other bidders,
including WAG, to pay for them at a public auction. This argument is flawed in
two respects. First, many, if not all, of the joint venture’s “competitive secrets”
are licensed patents and technological trade secrets and know-how developed by
WAG. Second, WSI fails to explain why other bidders would be dissuaded if
WAG has prior access to those secrets, but would not be if Magna, also a potential
bidder, has the same access.30
I conclude, for these reasons, that WAG has demonstrated its entitlement to
29&e, Sack v. Cadence Industries., Del. Ch., C.A. Nos. 474’7 & 4765, Brown, V.C. (Apr.
9, 1975) (stockholder entitled to inspect books and records to assist it in deciding how to respond
to proposed settlement in pending New York action).
3oI place little credence in WSI’s protestation that Magna has no greater access to WSI’s
books and records than does WAG. Magna controls the day-to-day operations of WSI, and
therefore controls access to WSI’s records. Even assuming that Magna has voluntarily chosen
not to exercise that control to grant itself complete access, Magna has the ability to do that
whenever it chooses. WAG, which owns the same percentage of equity as Magna, does not.
23
inspection under 5220, and that in these specific circumstances the scope of that
inspection will be coextensive with the scope of the inspection granted to plaintiff
Korttim. I turn to the remaining issue, which is whether any conditions upon
WAG’s exercise of those rights should be imposed.
3. Conditions of WAG’s Inspection
Many of the arguments that WSI contends defeat WAG’s entitlement to
inspection are also asserted as grounds for limiting or con,ditioning the scope of
the inspection. To avoid overburdening this already lengthy opinion, I address
only the single argument that was not addressed in Section B (2) above. As for the
remaining arguments I conclude that for the same reasons they do not defeat
WAG’s entitlement to inspection, those arguments also should not operate to limit
or restrict the scope of WAG’s inspection.
WSI (Magna) contends that if inspection is allowed, it should include only
the documents to which WAG would be entitled--and which it has already been
provided-- under the Shareholders Agreement, i.e., annual1 budgets, audited annual
financial statements, and monthly unaudited financial statements. But the
Shareholders Agreement does not contractually limit the information that must be
provided to WSI shareholders, nor does it expressly provide for a waiver of
statutory inspection rights under $220. There can be no waiver of a statutory right
24
unless that waiver is clearly and affirmatively expressed in the relevant
document.3’
There shall be one limitation, which shall apply equally to WAG and
Korttim. For the same reasons that Korttim may not disclose information obtained
from the inspection to Hollandia; any other officers, directors, employees or
agents of WAG who receive access to such information shall be similarly
prohibited. Moreover, and subject to the above condition, any information
obtained from the inspection shall be disclosed only to WAG personnel (other
than employees or agents of Hollandia), and persons assisting the plaintiffs in the
books and records inspection.
IV. CONCLUSION
Counsel for the parties shall confer and submit a form of order
implementing the rulings made herein.
31See Hintmann v. Fred Weber, Inc., Del. Ch., C.A. No. 12839, Steele, V.C., Mem. Op. at
28 (Feb. K1998); see also Ostrow at 30-3 1.
25
