21 December 2021

Periodic Reminder: Former Stockholders Have No Standing to Pursue Section 220 Demands

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On December 3, 2021, the Delaware Court of Chancery dismissed an action for books and records under Delaware General Corporation Law Section 220, reiterating that when a plaintiff files such an action, they must currently be a stockholder of the company against whom the Section 220 action is filed.

Specifically, a plaintiff must file a books and records action before a merger agreement becomes effective under its own terms; after the merger becomes effective, a plaintiff typically ceases to be a stockholder in the target company, which also precludes their ability to pursue books and records of that company. Companies facing Section 220 demands in the face of a merger agreement should scrutinize the demanding party’s standing to pursue such records.

Case Background and Holding

In Todd Swift v. Houston Wire & Cable Company, No. CV 2021-0525-LWW, 2021 WL 5763903, at *1 (Del. Ch. Dec. 3, 2021), the Chancery Court found that the plaintiff lacked standing when he filed a Section 220 action regarding a prior demand for documents concerning the value of his shares and purported wrongdoing by the board with respect to the at-issue merger. The merger agreement provided that the merger would be deemed effective when the target company (Houston Wire) filed a certificate of merger with the Delaware Secretary State and stockholders ceased to own stock in Houston Wire. Plaintiff Swift, however, filed his Section 220 action hours after a certificate of merger was submitted to the Delaware Secretary of State. Thus, the plaintiff was unable to demonstrate that he was a current stockholder of the target company, in accordance with Section 220(c). The Court noted that it previously “has recognized that stockholders can maintain standing if they lose their stock through a merger while their Section 220 litigation is pending. But they must be stockholders when that litigation is filed.” Id. at *4 (collecting cases). As a result, the Chancery Court held that plaintiff Swift lacked standing when he filed the Section 220 action, and accordingly dismissed the books and records action.

Takeaway:

The ruling in Swift is a reminder that companies facing Section 220 demands in connection with merger activity should carefully consider the demanding party’s standing from the moment the demand is served through the filing of any follow-on litigation.