Valuing Stock in a Delisted Corporation Is a Proper Purpose for a Books and Records Request Under DGCL §220; Evaluating Risk in That Company Is Not
By David Bernstein and B. Ashby Hardesty, Jr.
A Post-Trial Master’s Report ruled that conducting a risk evaluation regarding a company was not a proper purpose for a Section 220 books and records demand, but that valuing the company was.
On February 26, 2015, Master LeGrow issued her Final Report in Southpaw Credit Opportunity Master Fund LP v. Advanced Battery Technologies, Inc., C.A. No. 9542-ML (Del. Ch. February 26, 2015), recommending that the Court order Advanced Battery Technologies, Inc. (“ABAT”) to produce certain books and records for inspection under Section 220 of the Delaware General Corporation Law, subject to a standard confidentiality agreement.
In March 2014, believing ABAT stock was undervalued, Southpaw Credit Opportunity Master Fund, LP (“Southpaw”) demanded to inspect 20 categories of ABAT’s books and records since ABAT (a Delaware corporation with offices and operations based exclusively in China) had been delisted from the NASDAQ exchange (and was trading on the pink sheets) and had stopped filing annual and quarterly reports with the SEC. Southpaw’s stated purpose for the demand was to determine the value of its position in ABAT, the risk of maintaining that position, and the risk of increasing it. Southpaw also argued that it should not be required to enter into a confidentiality agreement that would prevent it from trading in ABAT stock after it received the information it was seeking and asked the Master to order ABAT to make the information public so trading by Southpaw would not violate SEC Regulation FD. ABAT argued that Southpaw did not have a proper purpose for the demand, that Chinese law precluded it from complying with the demand, and that if the demand were granted, that a confidentiality order and a restriction on trading accompany it.
Master LeGrow determined that conducting a risk assessment was not a proper purpose for a Section 220 books and records demand, but that valuing the company was, and therefore recommended an order requiring ABAT to produce information about the company’s financial results for the preceding year. Master LeGrow said that ABAT had not borne its burden of proving that providing the information outside of China would violate Chinese law, and recommended that ABAT be required to provide information, if necessary, by paying for the plaintiff’s counsel to inspect it in China. Finally, Master LeGrow said it was not clear that the Delaware courts could enforce federal prohibitions against trading on inside information, and in any event a Section 220 proceeding was not the proper context for them to do that. She said that after Southpaw received the information it was up to Southpaw to decide what it could and could not do without violating Regulation FD.