By Nick Froio
In this opinion, Vice Chancellor Noble considered a dispute involving a minority investor, Caspian Select Credit Master Fund Ltd. (“Caspian”), in a closely-held portfolio company, Key Plastics Corporation (“Key Plastics”), seeking to obtain certain books and records of Key Plastics pursuant to 8 Del. Code § 220. The Court found in favor of Caspian, holding that Caspian had stated proper purposes under Section 220, and that Key Plastics failed to demonstrate that those purposes were false or a pretense.
In initiating this Section 220 action, Caspian argued that the proper purposes for its books and records requests were to investigate the value of its interest and the potential waste, mismanagement, self-dealing, and other improper transactions related to a loan transaction between Key Plastics and an affiliate of Key Plastics’ controlling stockholders (the “Affiliated Loan”). Key Plastics argued that Caspian’s alleged purposes were not its primary motive and that they were a false pretense: Caspian already had the information needed to investigate any potential wrongdoing and was litigating solely to pressure the controlling stockholders to purchase its interest.
The Court stated that a stockholder seeking relief under Section 220 must demonstrate a proper purpose by a preponderance of the evidence, and that a proper purpose is one which is “reasonably related” to a holder’s “interest as a stockholder.” The Court found that Caspian’s desire to value its holdings was a proper purpose and that by having demonstrated evidence of its interest to sell its holdings (including its negotiations of a buy-out price with Key Plastics), Caspian had shown that such purpose was a primary purpose. The Court noted that once a primary purpose is found to be legitimate, any purported ulterior motive cannot overcome such finding to deny a books and records request under Section 220. In addition, the Court found that Caspian’s desire to investigate potential waste, mismanagement, self-dealing, and other improper transactions vis à vis the Affiliated Loan was also a proper purpose, as Caspian presented evidence that supported a credible basis for its concern of wrongdoing.
Finally, the Court found that Key Plastics had failed to show that Caspian’s purpose of valuing its interest was not its primary purpose and that Caspian’s stated purpose to investigate potential misconduct was false or a pretense. The Court also rejected Key Plastics’ defense that Caspian was in possession of all the information necessary to investigate, noting that Caspian had shown its primary motives were valid and that given the evidence produced by Caspian of potential wrongdoing Caspian was entitled to investigate further.