In re: New Media Books and Records Action ( 2015 )


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  •                               COURT OF CHANCERY
    OF THE
    STATE OF DELAWARE
    JOHN W. NOBLE                                                 417 SOUTH STATE STREET
    VICE CHANCELLOR                                                DOVER, DELAWARE 19901
    TELEPHONE: (302) 739-4397
    FACSIMILE: (302) 739-6179
    December 23, 2015
    James P. McEvilly, III, Esquire                Peter J. Walsh, Jr., Esquire
    Shlansky Law Group, LLP                        Potter Anderson & Corroon LLP
    824 Market Street, Suite 1000                  1313 North Market Street, 6th Floor
    Wilmington, DE 19801                           Wilmington, DE 19801
    Re:    In re: New Media Books and Records Action
    Consolidated C.A. No. 9984-VCN
    Date Submitted: October 22, 2015
    Dear Counsel:
    Plaintiffs Edward Deane, George Wihbey, and William Cunningham (the
    “Plaintiffs”) are members of Defendant New Media Investors II-B, LLC (“New
    Media”), a Delaware entity, established in 2000 as a vehicle for investing in
    Jenzabar, Inc. (“Jenzabar”), a software and internet services company.1 In 2004,
    Jenzabar was recapitalized and New Media received junior preferred stock and
    warrants.2 The warrants lapsed, without exercise, in 2013.3 Plaintiffs suggest
    improper conduct by Robert A. Maginn, Jr. (“Maginn”), the Managing Member of
    1
    Joint Pretrial Stip. and Order (“Pretrial Stip.”) § I.
    2
    See Joint Exhibits (“JX”) 1-3; Pretrial Stip. § II (15)–(20).
    3
    Pretrial Stip. § II (21).
    In re: New Media Books and Records Action
    Consolidated C.A. No. 9984-VCN
    December 23, 2015
    Page 2
    New Media and the Chief Executive Officer and Chairman of the Board of
    Jenzabar.4   Efforts to dissolve New Media were initiated in 2013, although
    Plaintiffs did not cash their distribution checks. Instead, they eventually made a
    books and records request under 6 Del. C. § 18-305. The purposes of their
    inspection demands range from valuation of their holdings of New Media to
    investigation into misconduct by Maginn and others in the course of operating
    New Media.5
    This Letter Opinion sets forth the Court’s post-trial findings of fact and
    conclusions of law.
    ***
    Over a seven-month period in 2014 and 2015, Plaintiffs made separate
    proper books and records demands upon New Media.6 Plaintiffs must show by a
    preponderance of the evidence that they have a proper purpose for inspection of
    4
    Pls.’ Opening Pre-Trial Br. 2.
    5
    Their wide-ranging designation of documents may be found at Pretrial Stip.
    § II (11).
    6
    JX 6, 10, 12; Pretrial Stip. § II (6).
    In re: New Media Books and Records Action
    Consolidated C.A. No. 9984-VCN
    December 23, 2015
    Page 3
    any record that they seek.7     Although the requests identified seven different
    purposes for the inspections, they can be consolidated into valuation and
    investigation of misconduct. Valuation is a proper purpose.8 Misconduct may be
    the foundation for a books and records inspection, but a plaintiff seeking such
    records must have made a showing by a preponderance of the evidence of a
    credible basis from which to infer mismanagement.9 A simple statement that the
    purpose is to investigate possible mismanagement does not satisfy this standard.10
    Plaintiffs have not provided a credible basis, and thus, they have not demonstrated
    that investigating misconduct or wrongdoing is their proper purpose.11
    7
    Sec. First Corp. v. U.S. Die Casting & Dev. Co., 
    687 A.2d 563
    , 567 (Del. 1997).
    8
    CM & M Gp., Inc. v. Carroll, 
    453 A.2d 788
    , 792 (Del. 1982); Ostrow v. Bonney
    Forge Corp., 
    1994 WL 114807
    , at *11 (Del. Ch. Apr. 6, 1994).
    9
    Sec. First Corp., 
    687 A.2d at 567
    .
    10
    Seinfeld v. Verizon Commc’ns, Inc., 
    909 A.2d 117
    , 122 (Del. 2006). See also
    Sutherland v. Dardanell Timber Co., 
    2006 WL 1451531
    , at *8 (Del. Ch. May 16,
    2006).
    11
    Plaintiffs argue that the failure to exercise the warrants before they expire
    amounts to self-dealing because Maginn is a fiduciary of both New Media and
    Jenzabar, and Maginn and his wife are substantial owners of Jenzabar stock. See
    Pretrial Stip. § II (3)–(5). The only articulated concern that potentially involves
    wrongdoing depends upon whether the warrants were “under water,” which in turn
    is a subset of the Plaintiffs’ greater concern about valuation. Plaintiffs have made
    no showing that the warrants were of value when they expired.
    In re: New Media Books and Records Action
    Consolidated C.A. No. 9984-VCN
    December 23, 2015
    Page 4
    ***
    Plaintiffs have demonstrated that valuation is a proper purpose. Inspection
    of books and records in this instance is a statutory right. The question is whether
    Plaintiffs may inspect books and records of both New Media and Jenzabar. The
    statute allows for inspection of the books and records of the entity in which the
    plaintiff is a member. Maginn is both a fiduciary of New Media and the Chief
    Executive Officer of Jenzabar. That, however, does not, at least without more,
    establish an entitlement of Plaintiffs to inspect the books and records of Jenzabar, a
    different entity, even though valuation of Jenzabar would help in reaching an
    understanding of the value of New Media. Perhaps with evidence of wrongdoing,
    the inspection rights would extend to Jenzabar, but no such showing has been
    made.12 Merely sharing fiduciaries does not extend an inspection obligation from
    one entity to the next.
    12
    New Media is but an investor in Jenzabar; Jenzabar is not a subsidiary of New
    Media and New Media is not a controlling shareholder of Jenzabar. Cf. Arbor
    Place, L.P. v. Encore Opportunity Fund, L.L.C., 
    2002 WL 205681
    , at *6 (Del. Ch.
    Jan. 29, 2002) (“[T]his Court has consistently held that a stockholder generally has
    no right to inspect the books and records of a subsidiary corporation where the
    stockholder merely owns shares of the parent corporation.”).
    In re: New Media Books and Records Action
    Consolidated C.A. No. 9984-VCN
    December 23, 2015
    Page 5
    ***
    New Media objects to allowing Plaintiffs’ attorneys access to any books and
    records subject to the Court’s inspection order. That law firm has a separate
    proceeding against Jenzabar pending in Massachusetts, in which a different
    plaintiff has claims related to rights in Jenzabar’s warrants.13 Plaintiffs agree that
    their lawyers should not use the books and records obtained through this action for
    any purpose related to that separate action. A confidentiality restriction on the use
    of the books and records produced as a result of this proceeding should suffice,
    especially since the scope of the to-be-ordered inspection is significantly narrower
    than the scope of Plaintiffs’ request.
    13
    Cf. Henshaw v. Am. Cement Corp., 
    252 A.2d 125
    , 130 (Del. Ch. 1969) (while a
    director, in examining corporate materials, is entitled to the assistance of agents of
    his own choosing, such agents “should not have any interest adverse to the
    corporation”).
    In re: New Media Books and Records Action
    Consolidated C.A. No. 9984-VCN
    December 23, 2015
    Page 6
    ***
    The Court turns to identifying the books and records of New Media
    “necessary, essential and sufficient” for Plaintiffs’ valuation purposes,14 including
    assessing the value, if any, of the warrants which have since expired.
    Plaintiffs have sought books and records from a period far beyond that
    necessary for valuation. No reason for going back to 2004—the year of Jenzabar’s
    recapitalization—has been set forth. The dissolution occurred in 2013.15 A few
    years before then—2010—through the current books and records reasonably meets
    Plaintiffs’ needs.
    The books and records of New Media, essentially a holding entity for some
    interest in Jenzabar, are likely to be of limited scope.       Financial statements
    (unaudited, if audited are not available) and any projections of value of either New
    Media or, if among New Media’s books and records, Jenzabar are to be
    14
    Norfolk Cnty. Ret. Sys. v. Jos. A. Bank Clothiers, Inc., 
    2009 WL 353746
    , at *6
    (Del. Ch. Feb. 12, 2009), aff’d, 
    977 A.2d 899
     (Del. 2009) (TABLE).
    15
    See JX 5.
    In re: New Media Books and Records Action
    Consolidated C.A. No. 9984-VCN
    December 23, 2015
    Page 7
    produced.16    In addition, any books and records addressing, considering, or
    assessing the question of whether to exercise the warrants, including a valuation of
    the warrants and the underlying rights in Jenzabar, shall also be submitted to
    Plaintiffs for their inspection.
    IT IS SO ORDERED.17
    Very truly yours,
    /s/ John W. Noble
    JWN/cap
    cc: Register in Chancery-K
    16
    The books and records ordered to be produced are solely those of New Media,
    and New Media has no affirmative duty to seek or obtain Jenzabar records for
    purposes of this action. To the extent they are among New Media’s books and
    records, documents reflecting the value of Jenzabar fall within the reach of 6 Del.
    C. § 18-305 because New Media’s value depends solely on that of Jenzabar.
    17
    The parties shall bear their own costs.
    

Document Info

Docket Number: CA 9984-VCN

Judges: Noble

Filed Date: 12/23/2015

Precedential Status: Precedential

Modified Date: 12/28/2015