Mehta v. Kaazing Corporation ( 2017 )

COURT OF CHANCERY
OF THE
STATE OF DELAWARE
417 S. State Street
JOSEPH R. SLIGHTS III Dover, Delaware 19901
VICE CHANCELLOR Telephone: (302) 739-4397
Facsimile: (302) 739-6179
Date Submitted: August 2, 2017
Date Decided: September 29, 2017
Sidney S. Liebesman, Esquire Gerald J. Hager, Esquire
Montgomery McCracken Margolis Edelstein
Walker & Rhoads, LLP 300 Delaware Avenue, Suite 800
1105 North Market Street, Suite 1500 Wilmington, DE 19801
Wilmington, DE 19801
Re: Mehta v. Kaazing Corporation
C.A. No. 2017-0087-JRS
Dear Counsel:
To follow is the Court’s post-trial decision in this matter. As you know, the
Plaintiff, Vikram Mehta, seeks to inspect certain books and records of Defendant,
Kaazing Corporation. For the reasons that follow, I have determined that Mehta is
entitled to inspect some, but not all, of the books and records he seeks.
I. BACKGROUND FACTS
The following facts reflect my factual findings based on a preponderance of
the evidence as presented in the parties’ pre-trial stipulation and order, the thirty-
Mehta v. Kaazing Corporation
C.A. No. 2017-0087-JRS
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four (34) joint documentary exhibits introduced at trial on August 2, 2017, and the
parties’ pre-trial briefing and post-trial status update.1
Kaazing Corporation (“Kaazing” or the “Company”) is a Delaware
corporation with its principal place of business in San Jose, California.2 It “offers
products that enable mobile users, applications, marketplaces and machines to
connect and communicate in real-time.”3
Mehta is a stockholder of Kaazing. He was Kaazing’s Chief Executive
Officer (“CEO”) from October 2013 to April 2015, when he was terminated from
that position by the Kaazing Board of Directors (the “Board”).4
In early 2013, prior to Mehta’s employment with the Company, the
Company raised $15 million in a Series B financing round led by Columbus Nova
Technology Partners (“CNTP”) and New Enterprises Associates (“NEA”).
Following their investments, both NEA and CNTP were represented on the
1
Citations to joint exhibits are to “JX #”; to the Joint Pretrial Stipulation are to “PSO ¶”;
and to the trial transcript are to “Tr. #.”
2
PSO ¶ 2.
3
Def.’s Trial Br. 3.
4
PSO ¶¶ 1, 9.
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Company’s Board. 5 Soon after the Series B financing closed, Mehta led an
additional capital raise of $6.9 million through a Series C financing round, and then
arranged for a $3 million working capital line of credit with Comerica Bank.6
At the time of Mehta’s termination, a term sheet for a $1.5 million extension
to the Comerica Bank line of credit had been executed and Mehta was finalizing
discussions with Intel Capital as well as a syndicate of individual investors to invest
in the Series C financing round.7 These investments were calculated to provide an
additional $7 million investment into the Series C financing round.8 On April 17,
2015, when Mehta was informed of his termination, he was under the impression
that the Comerica Bank line of credit extension had been secured, that the
documents necessary to finalize the Intel Capital investment were being prepared
5
PSO ¶¶ 3–4. CNTP now has two representatives on the Board pursuant to the terms of
the operative documents relating to the 2016 Series 1 Financing round. PSO ¶ 25.
6
Compl. ¶ 9; JX 6 at 32, 35–36; JX 7 at 74–75; JX 20.
7
JX 6 at 18, 29. The Intel Capital investment was conditioned on NEA’s and CNTP’s
pro-rata participation in the Series C financing round to ensure that two years’ worth of
operating capital would be available to the Company at the time of the closing. Id. at 18,
20.
8
Id. at 35–36. The syndicate of investors was contributing $1.5 million, Intel $4 million
and the Comerica Bank line was to be extended by $1.5 million. Id.
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by attorneys and that around $1.25 million of the syndicate investor commitment
had already been wired to a Company escrow account.9 Despite Mehta’s efforts,
the Company ultimately failed to close on Intel Capital’s $4 million Series C
financing and did not receive the extension on the Comerica Bank line of credit.10
After Plaintiff’s termination, Mohsen Moazami, CNTP’s Managing
Director, became Executive Chairman of the Board. At that time, Kaazing also
named Robert Miller (“Miller”) as interim CEO and, in September 2015, appointed
Miller as permanent CEO.11 Miller, in turn, hired Michael Floyd (“Floyd”), whom
he knew from a prior business association, as Kaazing’s Chief Operating Officer
9
Id. at 35–36 (“So from where I was sitting, the company was—had six and a half million
dollars in the bank, $1.25 million of a $1.5 million commitment sitting in an escrow,
$4 million committed from Intel, which would have doubled, you know, another
$1.5 million expansion to the working capital line.”). Mehta asserts that NEA’s and
CNTP’s commitments, required by Intel Capital’s conditions on investing, were “just a
case of kicking the ball through the goalposts,” and that while the documents had not been
signed at the time, correspondence indicated that the commitments were certain. Id. at
37, 39–40. The Company asserts that the commitments were not certain and that the
Company, under Mehta, was in fact short of the amount necessary for Intel Capital to
commit its investment. The Company also maintains that Comerica Bank had expressed
concern as to the financial standing of the Company in connection with its decision not
to extend the line of credit. JX 7 at 77–78.
10
JX 6 at 35–36.
11
PSO ¶¶ 19–11.
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in August 2015.12 According to Mehta, both Miller and Floyd were able to obtain
unusually generous compensation packages, further harming the already
financially strained Company.13
Mehta also asserts that, in the summer of 2015, the Company inexplicably
terminated the employment of a number of Kaazing engineers who had been tasked
during Mehta’s time as CEO with developing an end-to-end messaging system that
would have greatly advanced the Company’s offerings.14 These employees were
subsequently hired by TIBCO to the further detriment of the Company. 15
12
PSO ¶ 13, JX 7 at 23, 25. Miller is the Founder and Chairman of Cloak Labs, a file
transfer company, and Floyd is Cloak Labs’ CEO. PSO ¶¶ 12, 14. According to the
parties’ stipulations, both still hold their respective positions at Cloak Labs. Id.
13
JX 6 at 80. Mehta further asserts that the Company as a whole, with only 40–45
employees “maintained a bloated and expensive management and governance structure”
with six executive officers as well as seven voting Board members and two non-voting
observers. Id. at 83.
14
App. to Def.’s Trial Br. Ex. A, at MEHTA_00668; JX 6 at 60, 62. The engineers were
hired at Mehta’s direction to develop a product that would allow Kaazing to reduce its
customer concentration and reliance on TIBCO, a company licensing Kaazing’s product.
JX 6 at 43–45. Mehta asserts that TIBCO was positioning itself to compete with the
Company and that, as Kaazing’s CEO, he engaged a team of engineers in Chicago to
develop processes that would allow Kaazing to offer a “more holistic” product. Id. at 46.
15
Id. at 60, 62.
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Despite the failure to close on the investments Mehta had, in his eyes,
secured prior to his termination, Miller contacted shareholders on February 28,
2016, to apprise them that the Company “ended 2015 with a very strong Q4.”16 In
this communication, he further informed the shareholders of Kaazing’s plans to
extend its Series C financing round to raise an additional $15 million and noted that
the opportunity to invest would be open to “all existing investors” with “CNTP
leading the round.”17 Mehta did not receive this communication when it was first
mailed.18 After Mehta made several inquiries to the Company, Miller forwarded
the communication to Mehta via email on March 29, 2016, well after others had
already invested.19
On March 25, 2016, Kaazing delivered a vastly different message to its
stockholders when it informed them of the need to engage in a $1 million bridge
financing (the “2016 bridge financing”) so that the Company could continue to
16
JX 14.
17
JX 19.
18
PSO ¶ 19; JX 18.
19
JX 18; JX 6 at 121.
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operate.20 This 2016 bridge financing was again led by CNTP which had already
committed to contribute up to $500,000 through a promissory note (the “CNTP
note”) with the remainder of the financing opportunity to be open to other
shareholders.21 According to Mehta, the CNTP note contained terms favorable to
CNTP to the detriment of the Company and its shareholders.22 Without prior notice
to shareholders, the Company’s 2016 bridge financing note was thereafter amended
twice to allow for investments of up to $2 million. Here again, the Company
permitted CNTP to participate in the financing round prior to extending the
opportunity to other shareholders.23 In the midst of scrambling to secure bridge
20
JX 6 at 118–20.
21
JX 16. In order for other shareholders to participate in the 2016 bridge financing, those
shareholders had to complete an indication of interest form, which, in Mehta’s view,
would cause them to relinquish their pro rata investment rights under Kaazing’s Investors’
Rights Agreement.
22
Mehta claims that the 2016 bridge financing was “repayable within three months from
the date of closing with an annual interest rate of eight percent . . . [and that] while any
amount of the [CNTP note] was outstanding, the Company could not consummate a
preferred stock financing, sale or exclusive license of all or substantially all of the assets
of the Company, or execute a change of control of the Company, unless the holders of
the Note (i.e., CNTP) were paid an amount in cash equal to 300% of the then outstanding
principal due under the [CNTP Note] plus accrued interest.” Compl. ¶ 22.
23
JX 20. Shareholders were informed of the increase by letter dated August 5, 2016.
Id. at 2. At the time of the increase to $2 million, $600,000 were still available under the
2016 bridge financing note. Id. In the August 5, 2016, communication, shareholders
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financing, at some point in mid-2016, Kaazing acquired Montage Studio, a
software company, and thereafter employed a number of former Montage Studio
employees. Stockholders were not advised of the acquisition until after the deal
was signed.24
In July 2016, Kaazing executed a term sheet with CNTP for a Series 1
financing round (the “Series 1 Financing”). 25 The Series 1 Financing was
presented to shareholders in correspondence from the Company dated August 5,
2016. At the same time, shareholders were invited to participate in additional 2016
bridge financing. This communication also apprised shareholders that the Series 1
Financing would lead to a reverse stock split and recapitalization of all shares of
preferred stock into common stock.26 Given the significant impact of the Series 1
were informed of CNTP’s commitment to participate in $250,000 and were offered
participation in the remaining $350,000. Id.
24
Compl. ¶ 26; PSO ¶ 41 (including “[c]losing documents for Montage Studio
acquisition . . .”); id. ¶ 24.
25
JX 20 at MEHTA_00013.
26
The Series 1 Financing Term Sheet reserved investment amounts for certain Kaazing
shareholders and management. JX 20 at MEHTA_00016. Out of the up to $4 million in
investment opportunities, $1 million was set aside for CNTP, up to $1 million for Kaazing
management (with Miller agreeing to invest at least $250,000) and $1 million for other
existing shareholders. Id. The Term Sheet additionally required the post-financing
composition of the Board to be determined by the Board and CNTP and that “[v]oting
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Financing on existing shareholders, the shareholders were advised that, prior to
acceptance of the CNTP term sheet, Kaazing’s Board had formed a “disinterested”
sub-committee which reviewed the proposed transaction and had unanimously
approved the CNTP proposed term sheet. 27 Mehta asserts that, consistent with
other financing rounds, the Series 1 Financing term sheet was favorable to CNTP
while requiring other shareholders to waive certain shareholder rights before they
could participate, effectively excluding him and similarly-situated shareholders
from the opportunity.28
After certain shareholders (including Mehta) expressed concern regarding
the impact of the Series 1 Financing on their investment, Kaazing held a
shareholder meeting on September 22, 2016, to provide information concerning the
Series 1 Financing. 29 During this meeting, Mehta and other similarly-situated
shareholders again received an invitation to participate in the Series 1 Financing on
thresholds for amendments, waivers and approvals shall be set at a percentage of the
voting securities such that CNTP shall have veto power.” Id. at MEHTA_00018.
27
JX 20.
28
Compl. ¶ 25.
29
Tr. 23, JX 6 at 10, JX 29.
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the condition that they sign certain documents that Mehta believed might result in
the relinquishment of shareholder rights under Kaazing’s Investors’ Rights
Agreement.30 For that reason, he declined to participate. The Series 1 Financing
led to a dilutive conversion of Mehta’s 506,124 shares of Series B-1 preferred stock
to 10,616 shares of common stock.31
On January 10, 2017, Mehta sent a demand to Kaazing pursuant to 8 Del. C.
§ 220 (the “Demand”) in which he sought inspection of certain books and records
to “(i) ascertain the value of his stock; (ii) ascertain whether there has been
mismanagement, waste, or wrongdoing by the Company’s agents and
representatives; (iii) determine what impact if any this mismanagement, waste, or
wrongdoing, has had, or might have, on the value of Plaintiff’s shares of the
Company; and (iv) communicate with other shareholders of the Company
30
JX 20 at 2, JX 16, JX 6 at 169–70, 191–93. Mehta maintains that this condition was
not imposed upon all Kaazing stockholders. He further asserts that certain Montage
employees that were not previously Kaazing shareholders were offered the opportunity
to participate in the 2016 bridge financing prior to that opportunity being offered to other
shareholders (Mehta included), thus violating his rights under the Kaazing Investors’
Rights Agreement. JX 6 at 99, 108. He states that he was unable to ascertain who, in
fact, participated in the 2016 bridge financing because his access to the information was
denied unless he agreed to execute the Company’s onerous nondisclosure statement.
Id. at 97.
31
JX 20, PSO ¶ 25.
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concerning the above.”32 Kaazing responded by noting that the Demand did not
comply with Section 220 in that it lacked the required oath, was overbroad and
failed to state a proper purpose.33 Nevertheless, Kaazing offered to make certain
documents available to Mehta (and other shareholders) if they signed an
appropriate confidentiality agreement. It also offered to meet and confer with his
counsel to ascertain whether additional documents might be made available for
inspection.34 Mehta rejected the offer and, soon after, filed this Section 220 action
on February 6, 2017.35
II. ANALYSIS
Under Section 220, a shareholder seeking to inspect books and records has
the burden of proving (1) that he is in fact a stockholder of the defendant company,
(2) that he has complied with the Section 220 requirements concerning form,
manner and making of the demand and (3) that the inspection is sought for a proper
32
JX 1 ¶ 29.
33
JX 3.
34
JX 3.
35
PSO ¶¶ 1, 29.
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purpose. Kaazing no longer disputes the form and manner of Mehta’s Demand.36
Instead, its defense focuses on whether Mehta has stated a proper purpose for
inspection and whether he has properly limited the scope of the documents he
seeks.
A proper purpose under Section 220 is “a purpose reasonably related to such
person’s interest as a stockholder.”37 The stockholder has the burden of proving
the proper purpose by a preponderance of the evidence, and such proper purpose
must be proven for every item sought. 38 When a plaintiff seeking inspection
demonstrates a proper primary purpose, the fact that a secondary purpose may also
prompt the demand for inspection is irrelevant.39
Kaazing maintains that Mehta’s true purpose in demanding inspection is to
gather documents not accessible to him through discovery in employment litigation
36
Def.’s Am. Trial Br. 9.
37
8 Del. C. § 220 (b).
38
Rock Solid Gelt Ltd. v. SmartPill Corp., 2012 WL 4841602, at *3 (Del. Ch. Oct. 10,
2012) (citing Thomas & Betts Corp. v. Leviton Mfg. Co., 681 A.2d 1026, 1028 (Del.
1996)).
39
Somerville S. Trust v. USV P’rs, LLC, 2002 WL 1832830, at *5 (Del. Ch. Aug. 2, 2002)
(citing Thomas, 681 A.2d at 1030 n.1).
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he has initiated against the Company and, more generally, to pursue a personal
vendetta he has against the Company. 40 For his part, Mehta alleges in his
Complaint that his purposes for seeking inspection are to:
(i) value his membership interest; (ii) ascertain whether there has
been mismanagement, waste, or wrongdoing by the Company’s
agents and representatives pertaining to the 2016 Bridge Financing
Transactions and Bridge-Financing linked Series 1 Financing
Transactions; (iii) determine what impact any mismanagement, waste,
or wrongdoing has had or might have, on the value of Mr. Mehta’s
shareholding of the company; (iv) communicate with other
shareholders of the Company concerning the above; and (v) consider
possible breaches of fiduciary duties by managers and directors of the
Company.41
Of these, at trial Mehta continued to advance as his proper purposes the valuation
of his membership interest in Kaazing and the investigation of mismanagement,
waste or wrongdoing.42
40
Def.’s Am. Trial Br. 3.
41
JX 1 at 3.
42
Pl.’s Pre-Trial Br. 2. (“Mr. Mehta served the Demand for the proper purposes of
valuing his share ownership . . . and to investigate potential waste, mismanagement and
wrongdoing based on actions taken by the Company and its Board of Directors.”). Id.While Plaintiff mentioned all purposes advanced in the Complaint at trial, he did not
present any support for the additional purposes in his trial brief or closing argument.
Tr. 18 (listing all Complaint purposes); Tr. 24 (“And while some of these [document
requests] go to valuation, we believe all of the documents that are requested we would be
entitled to even if our purpose was simply to investigate mismanagement and waste.”).
Plaintiff’s more narrow statement of purpose is further evidenced by his more refined
Mehta v. Kaazing Corporation
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It is settled in Delaware law that the valuation of one’s stock can be a proper
purpose for the inspection of books and records if there is a particular need or
reason for the valuation.43 In this case, however, Mehta has not demonstrated that
valuing his membership interests justifies inspection since he has failed to identify
any reason why he needs to value his membership interests at this time.44
requests for inspection. See, e.g., Carapico v. Phila. Stock Exch., Inc., 791 A.2d 787, 791
(Del. Ch. 2000) (finding that only certain document requests remained at issue after the
cancellation of a merger and narrowing the purposes originally stated according to the
documents still requested).
43
Polygon Global Opportunities Master Fund v. West Corp., 2006 WL 2947486, at *3
(Del. Ch. Oct. 12, 2006); Beatrice Corwin Living Irrevocable Tr. v. Pfizer, Inc., 2016
WL 4548101, at *4 (Del. Ch. Aug. 31, 2016).
44
See, e.g., Carapico, 791 A.2d at 792–93 (“Entitlement to inspection under § 220 for a
stockholder demonstrating a proper purpose is not open-ended; it is restricted to
inspection of the books and records needed to perform the task.”) (internal quotation
marks omitted); see also Sec. First Corp. U.S. Die Casting & Dev. Co., 687 A.2d 563,
568–69 (Del. 1997) (“Mere curiosity or a desire for a fishing expedition will not
suffice. . . . In his deposition and at trial [] [Plaintiff] admitted that he had no idea what
he would do with [the information]. It is a sufficient defense for a corporation to show
that a stockholder list was sought from idle curiosity.”) (internal quotation marks
omitted); Helmsman Mgmt. Serv., Inc. v. A&S Consultants, Inc., 525 A.2d 160, 165 (Del.
Ch. 1987) (finding that while it is possible that a “shareholder in a closely-held
corporation needs to value his stock to enable him to decide whether or not to sell, and,
if so, on what terms,” “[i]t is not sufficient for [Plaintiff] merely to assert that it would
like to value its A&S stock. Without a showing of a present need for such a valuation, a
mere statement of that purpose, though valid in law, might not be bona fide in fact.”).
Mehta v. Kaazing Corporation
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The investigation of mismanagement, waste and wrongdoing is also a proper
purpose for inspection.45 In order to inspect books and records for these purposes,
Plaintiff must present “some evidence” that provides a “credible basis” from which
the court can infer possible mismanagement.46 This threshold requirement “sets
the lowest possible burden of proof,” and may be met “by a credible showing,
through documents, logic, testimony or otherwise, that there are legitimate issues
of wrongdoing.”47
With Plaintiff’s low burden of proof in mind, I am satisfied that he has
adequately demonstrated a credible basis to suspect wrongdoing that justifies
further investigation into mismanagement. Mehta’s evidence of possible
wrongdoing points to Kaazing’s stable financial status immediately prior to his
termination and the Company’s rather sudden need for bridge financing after his
termination, as well as the Board’s apparently contradictory statements in early
2016 regarding the Company’s financial success in 2015. 48 He suggests that
45
Beatrice Corwin, 2016 WL 4548101, at *4.
46
Seinfeld v. Verizon Commc’ns, Inc., 909 A.2d 117, 118 (Del. 2006).
47
Id. at 123 (citing Sec. First Corp., 687 A.2d at 568) (internal quotation marks omitted).
48
Pl.’s Pre-Trial Br. 25; JX 6 at 34–35, 91–92.
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mismanagement took place in the form of preferential treatment of certain
investors, particularly CNTP, whom he claims had control over the Board. 49
Specifically, Mehta points to the fact that he and other stockholders were boxed
out of opportunities to participate in financing rounds while other shareholders
were accommodated.50
In addition to his theory that the Board improperly gave preferential
treatment to certain shareholders to the detriment of others (including himself),
Mehta suggests that mismanagement or waste took place in connection with the
employment agreements extended to Miller and Floyd. To support these claims,
Mehta presented evidence that Miller and Floyd enjoyed a close professional
49
In support of his claim, Mehta presented evidence that CNTP has two seats on the
Board, that CNTP was receiving information other shareholders were not privy to, that
CNTP suggested the Series 1 Financing which led to the dilution of Plaintiff’s investment,
and that CNTP was able to secure additional equity investments in the form of a
promissory note on favorable terms in March 2016, modified in April 2016, all in
violation of a pro-rata provision in the Kaazing Investor’s Rights Agreement. PSO ¶¶ 20–
22, JX 8.
50
JX 6 at 99, 132, 134. In addition to the favorable treatment of CNTP, Mehta alleges
that certain Montage Studio employees and affiliates were given investment opportunities
in violation of his and other shareholders’ rights. Id. at 99.
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relationship at Cloak Labs, 51 and that Miller alone set Floyd’s compensation.52
Additionally, Mehta testified that Kaazing’s Director of Finance expressed her
view that the compensation was substantial (around $50,000 per month).53 While
this evidence by no means proves wrongdoing, the applicable standard requires
Plaintiff to present only some evidence that supports a credible basis for the Court
to infer the possibility of wrongdoing such that further investigation is justified.
Plaintiff has crossed this low threshold here.
Having determined that Mehta has demonstrated proper purposes, I turn next
to the scope of documents Mehta may inspect in pursuit of these purposes. Once a
plaintiff has established a proper purpose, Delaware law provides that he is only
entitled to those documents that “address the crux of the shareholder’s purpose”
and that are unavailable from another source, making the records necessary and
essential.54 Thus, “inspection should stop at the quantum of information that the
51
PSO ¶¶ 11–14.
52
JX 7 at 23–24.
53
JX 6 at 77.
54
Wal-Mart Stores, Inc. v. Indiana Elec. Workers Pension Trust Fund IBEW, 95 A.3d
1264, 1271 (Del. 2014) (citing Espinoza v. Hewlett-Packard Co., 32 A.3d 365, 371–72
(Del. 2011)).
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court deems sufficient to accomplish the plaintiff’s stated purpose.” 55 “[I]f the
stockholder already has sufficient information from other sources or as a result of
other books and records requests, then the inspection can be curtailed because the
additional documents are not essential.”56
Mehta originally sought 26 categories of documents.57 Since the filing of
the Complaint, Kaazing has produced or agreed to produce several documents
within these categories, including documents placed in a data room for
55
Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 788 (Del. Ch. 2016).
56
Id. I note that Mehta proffered the termination of the Chicago engineering team later
hired by TIBCO and the acquisition of Montage as further evidence of wrongdoing that
would justify inspection. Since those transactions do not appear to be connected to the
documents he seeks to inspect (as identified in his supplemental submission), and also
since it appears that he has now been provided with documents relating to those issues,
I need not address those matters further. Tr. 25 (Plaintiff stating that he is looking for
closing documents for Montage Studios transaction); PSO ¶ 41 (listing “[c]losing
documents for Montage Studios” as documents provided or agreed to be provided by the
Company); JX 2 at 6; Status Letter 2–3 (providing the list of the six categories of
documents Mehta now seeks, none of which relate to the “disbanding” of the Chicago
engineers). See Norfolk Cnty. Ret. Sys. v. Jos. A. Banks Clothiers, Inc., 2009 WL 353746,
at *10 (Del. Ch. Feb. 12, 2009) (finding that the plaintiff had received documents which
“should suffice for the purpose” stated and that the plaintiff “must [] articulate a
reasonable need for whatever additional documents it seeks.”); Polygon Global, 2006 WL
2947486, at *3 (finding a proper purpose but denying inspection when the information
was available from public filings).
57
JX 1 ¶ 29.
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shareholders to review in connection with the Series 1 Financing opportunity.
These documents include the following: “409A Valuation Report – Kaazing
9/30/15, Cash Flow Q316-Q317, Unaudited Balance Sheets Q116-Q216,
Unaudited Statement of Cash Flows Q116-Q216, Unaudited Statement of
Operations Q116-Q216, Pro Forma Cap Table, [and the] Video tape of
September 22, 2016 stockholders meeting.”58
In addition to the data room documents, the Company has agreed to produce:
communications with shareholders regarding the bridge financing and the Series 1
Financing; shareholder registers and cap tables sufficient to show shareholdings
before and after the bridge financings and Series 1 Financing; Board and Board
committee and subcommittee meeting materials/presentations and minutes from
April 2015 through December 31, 2016; closing documents for B-1, C-1, Series 1
Financing and 2016 bridge financing (including preferred warrant agreements with
SQN Capital and a subordination agreement with Comerica that were part of the
bridge financing); cap tables from April 17, 2015, February 28, 2016; Miller and
Floyd employment agreements and consulting agreements, including documents
58
PSO ¶ 30.
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describing applicable management incentive plans; unaudited quarterly and annual
financial statements (balance sheets, income statements, statements of cash flows)
for 2014, 2015 and 2016; 409A valuations for 2015 after Series C was completed;
closing documents for the Montage Studio acquisition, including any agreements
with Montage investors, founders or employees; and the presentation provided by
Miller regarding Cloak Labs.59
Upon the Court’s request, the parties submitted a letter following closing
arguments in which they listed the outstanding document categories that remain in
dispute. There are now six disputed categories:
1. The General Ledger of Kaazing Corporation (“Kaazing” or the
“Company”) for April 2015 through December 2016.
2. Documents evidencing discussions Kaazing's Board and
management had with COTA capital, Intel, SQN Capital, NEC, NEA,
CNTP, members of the Mehta investment syndicate and any other
investor that Kaazing contacted after it sent out the February 28, 2016
communication to shareholders regarding resurrection of the Series C
equity financing round.
3. Final, signed minutes of all Board and sub-committee meetings
including all materials presented at such meetings between April 1,
2015 and January 2017. If no other presentations exist and/or no other
materials were handed out at meetings other than any materials
already produced, a written representation that no other materials
exist . . . .
59
PSO ¶ 41.
Mehta v. Kaazing Corporation
C.A. No. 2017-0087-JRS
September 29, 2017
Page 21
4. Any Documents in addition to materials presented at Board or
subcommittee meetings that were reviewed by the Company’s Board
of Directors and any subcommittee thereof regarding the 2016 Bridge
Financing and Bridge-Financing linked Series 1 Financing and all
email communications among directors, management, NEA and
CNTP regarding the same.
5. All exhibits to the employment contracts for Bob Miller and
Michel Floyd.
6. Documents sufficient to show the constitution of the
Company’s Board of Directors and all subcommittees thereof,
including any changes thereto, from April 2015 through January 2017,
including documentation of the reason for any such changes.60
To reiterate, a plaintiff is entitled only to those documents necessary and
essential to fulfill his stated purpose and to which he does not otherwise have
access. 61 Given this focus, I have determined that Mehta is not entitled to
production of the general ledger under category one or documents related to the
constitution of the Board under category six.
As for the general ledger, Mehta states he needs to inspect this document in
order to investigate possible mismanagement, waste or wrongdoing. Specifically,
he claims that inspection of the general ledger will “allow [him] to determine how
60
Status Letter 2–3. “Defendant does not object to entry of an order requiring this
production and representation.” Id.61
Wal-Mart, 95 A.3d at 1271.
Mehta v. Kaazing Corporation
C.A. No. 2017-0087-JRS
September 29, 2017
Page 22
and where Kaazing was spending money, to determine what information was
obtained prior to entering into transactions and to identify any potential conflicts
of interests between Kaazing’s managers and affiliates and third parties.”62 As an
initial matter, the investigation into “how and where Kaazing was spending
money,” without more, is legally insufficient to justify inspection because it
reflects a general curiosity rather than a purpose to investigate possible
mismanagement.63 But more to the point, the production of the general ledger in
all of its detail is simply not justified here given the extensive financial documents
already provided or agreed to be provided in the form of Board minutes,
transactional documents and internal financial statements.64
62
JX 4 at 18.
63
See City of Westland Police & Fire Ret. Sys. v. Axcelis Techs., Inc., 1 A.3d 281, 287
(Del. 2010) (citing Seinfeld v. Verizon Commc’ns, Inc., 2005 WL 3272365, at *2–3 (Del.
Ch. Nov. 23, 2005), aff’d, 909 A.2d 117 (Del. 2006)) (describing the “credible basis
standard as striking the appropriate balance between (on the one hand) affording
shareholders access to corporate records that may provide some evidence of possible
wrongdoing and (on the other) safeguarding the corporation’s right to deny requests for
inspection based solely upon suspicion or curiosity. Thus, a mere statement of a purpose
to investigate possible general mismanagement, without more, will not entitle a
shareholder to broad § 220 inspection relief.”).
64
PSO ¶ 41; Tr. 28. Doerler v. Am. Cash Exch., Inc., 2013 WL 616232, at *5 (Del. Ch.
Feb. 19, 2013) (noting that the Court has the “responsibility to ensure that the plaintiff
has tailored his demand to the inspection to documents that are reasonably required to
satisfy the purpose of the demand” and holding that “the stockholder must tailor his
Mehta v. Kaazing Corporation
C.A. No. 2017-0087-JRS
September 29, 2017
Page 23
Nor is Plaintiff entitled to the documents requested under category six:
“[d]ocuments sufficient to show the constitution of the Company’s Board of
Directors and all subcommittees thereof, including any changes thereto, from April
2015 through January 2017, including documentation of the reason for any such
changes.” The stated purpose to inspect these records is “to ascertain whether
Kaazing’s Board was disinterested during the approval process of the transactions
at issue in this matter . . . [,] to determine whether the Company’s Board failed to
demand to documents that are necessary and essential to his proper purpose.”). I note
that this case is distinguishable from Doerler, where the court determined that inspection
of the general ledger was justified. There, the plaintiff claimed that the controlling
stockholder of the defendant company was using company accounts and funds for
personal purposes on a daily basis. Doerler, 2013 WL 616232, at *7. Defendants
presented no evidence to refute the claim. Id. Given the substantial number of
transactions at issue, and the lack of refuting evidence, the court determined that the
general ledger was necessary and essential to investigate the alleged commingling of
funds. Id. at 6, 8. Mehta has made no such allegations here. Instead, the information he
seeks relating to the discreet transactions he has identified, including the alleged potential
conflicts, can be readily gleaned from records Kaazing has already committed to produce.
Furthermore, while Mehta states that he requires the general ledger in order to investigate
“how the Company was spending its resources, and whether expenditures were proper or
were in the form of excessive bonuses or payments,” he has not presented any
discrepancies with regard to the Company’s finances, despite having been provided with
several financial documents from which he would have gleaned such evidence if it
existed. See, e.g., Norfolk Cnty. Ret. Sys., 2009 WL 353746, at *10 (“[Plaintiff] could
have studied the documents provided by the Company to show how these documents are
insufficient or how other documents are necessary. Yet, [Plaintiff] failed to do so. . . .
Thus, I conclude the Company has produced all the documents required under § 220.”).
Mehta v. Kaazing Corporation
C.A. No. 2017-0087-JRS
September 29, 2017
Page 24
establish a proper governance structure, whether the Board was illegally
reconstituted on April 13, 2015, whether a sub-committee of the Board was set up
after approval of certain transactions, and whether the subcommittee was staffed
with disinterested directors.”65 Here again, while the stated purpose is proper, the
documents requested by Mehta are not necessary and essential to pursue that
purpose in light of the documents Kaazing has already committed to provide.66 The
directors’ interests, the governance structure as well as the creation and
disinterestedness of the subcommittee can all be discerned from the Board and sub-
committee meeting minutes that the Company will produce under category three.
There is simply no need for the Company to produce more.
The balance of the categories identified in the parties’ status letter are
sufficiently targeted and narrow to justify inspection. As noted, Kaazing has
already agreed to produce Board materials.67 Plaintiff is also entitled to category
two documents: “[d]ocuments evidencing discussions Kaazing’s Board and
65
JX 4.
66
PSO ¶¶ 30, 41.
67
Status Letter 2. “Defendant does not object to entry of an order requiring this
production and representation.” Id.
Mehta v. Kaazing Corporation
C.A. No. 2017-0087-JRS
September 29, 2017
Page 25
management had with COTA capital, Intel, SQN Capital, NEC, NEA, CNTP,
members of the Mehta investment syndicate and any other investor that Kaazing
contacted after it sent out the February 28, 2016 communication to shareholders
regarding resurrection of the Series C equity financing round.” Mehta seeks to
inspect these documents in order to investigate mismanagement, waste or
wrongdoing and particularly to determine “whether Miller, Kaazing’s Board of
Directors and CNTP were providing preferential treatment to certain shareholders
while withholding information from Plaintiff and other similarly-placed
shareholders . . . [as well as to] investigate what Kaazing and its representatives did
to ensure that Plaintiff and other similarly-situated shareholders were not being
disenfranchised.”68 Based on the evidence presented and outlined above, as well
as the specified listing of communications requested, Plaintiff has demonstrated a
credible basis to investigate the mismanagement of the Company as it pertains to
the preferential treatment of shareholders and the requested documents are
sufficiently targeted to advance that purpose.
68
JX 4 at 11.
Mehta v. Kaazing Corporation
C.A. No. 2017-0087-JRS
September 29, 2017
Page 26
Plaintiff is also entitled to the fourth category of documents requested for the
same reasons he is entitled to inspect documents in category two. The category
four documents encompass “[a]ny documents in addition to materials presented at
Board or subcommittee meetings that were reviewed by the Company’s Board of
Directors and any subcommittee thereof regarding 2016 Bridge Financing and
Bridge-Financing linked Series 1 Financing and all e-mail communications among
directors, management, NEA and CNTP regarding the same.”69 Having found a
proper purpose for this information, I can see no basis to conclude that the scope
of this request is overly broad or burdensome and Kaazing has offered none.
Finally, Plaintiff is entitled to the fifth category of records requested to the
extent such records exist. Category five documents include “[a]ll exhibits to the
employment contracts for Bob Miller and Michel Floyd.” As per the Joint
Stipulation and [Proposed] Order entered by the Court on July 26, 2017, the parties
stated that the Company agreed to produce “Bob Miller[s] and Michael Floyd[s]
employment agreements and consulting documents, including documents
69
Status Letter 2.
Mehta v. Kaazing Corporation
C.A. No. 2017-0087-JRS
September 29, 2017
Page 27
describing applicable management incentive plans.”70 To the extent other exhibits
are appended to the employment agreements, Mehta is entitled to inspect them.
III. CONCLUSION
The parties shall confer and submit an implementing order within ten (10)
days. In addition to providing for the production of the documents as directed
herein, the implementing order shall also provide that Kaazing will provide a
certification of its compliance with any and all previous agreement(s) to produce
documents and of the completeness of the production(s).
Very truly yours,
/s/ Joseph R. Slights III
70
PSO ¶ 41.