Daniel Jaiyong An v. Archblock, Inc. ( 2023 )

COURT OF CHANCERY
OF THE
STATE OF DELAWARE
BONNIE W. DAVID COURT OF CHANCERY COURTHOUSE
MAGISTRATE IN CHANCERY 34 THE CIRCLE
GEORGETOWN, DE 19947
Date Submitted: November 6, 2023
Final Report: November 7, 2023
Daniel Jaiyong An A. Thompson Bayliss, Esquire
27 Calle Orta 3D APT Ben Lucy, Esquire
Cond Los Nardos A Abrams & Bayliss LLP
San Juan, Puerto Rico 00907 20 Montchanin Road, Suite 200
Wilmington, Delaware 19807
RE: Daniel Jaiyong An v. Archblock, Inc.,
C.A. No. 2023-0754-BWD
Dear Counsel and Mr. An:
This final report addresses defendant Archblock, Inc.’s (“Archblock” or the
“Company”) motion to dismiss plaintiff Daniel Jaiyong An’s (“Plaintiff”) Verified
Complaint to Compel Inspection of Books and Record[s] Under 8 Del. C. [§] 220
(the “220 Complaint”). For the reasons explained below, I recommend that the
motion to dismiss be granted and the 220 Complaint be dismissed with prejudice.
I. BACKGROUND
The following facts are drawn from the 220 Complaint, giving Plaintiff the
benefit of all reasonable inferences. I take judicial notice of filings in a related
proceeding before this Court captioned An v. Cosman, C.A. No. 2023-0715-LWW
(Del. Ch. July 14, 2023) (the “Plenary Action”). See Baca v. Insight Enters., Inc.,
Daniel Jaiyong An v. Archblock, Inc.,
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Page 2 of 14
2010 WL 2219715, at *1 (Del. Ch. June 3, 2010) (taking judicial notice of filings in
a parallel proceeding).
A. The Demand
Archblock is a Delaware corporation that develops blockchain software. Pl.’s
Verified Compl. to Compel Inspection of Books and Record[s] Under 8 Del. C. 220
[hereinafter, “220 Compl.”] ¶ 3, Dkt. 1. Plaintiff is the former CEO and a current
stockholder of the Company. Id. ¶ 2.
On June 29, 2023, the holders of a majority of the issued and outstanding
shares of the Company’s stock acted by written consent to approve the adoption of
an Agreement and Plan of Merger through which the Company would change its
domicile from Delaware to Switzerland (the “Redomestication Transaction”). Id.
¶¶ 4, 6.
On July 1, 2023, Plaintiff sent a letter to the Company demanding books and
records pursuant to Section 220 of the Delaware General Corporation Law (the
“Demand”). 220 Compl., Ex. 1 [hereinafter, “Demand”]. The Demand asserts that
“[t]he Company has provided scant information about the [Redomestication
Transaction], its purpose, or the economic terms for shareholders of the surviving
company.” Id. at 1. Accordingly, the Demand explains:
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In addition to requesting the mandatory information and stockholders
meeting date as required under the DGCL, [Plaintiff] also seek[s] to
investigate the events leading up to the approval and decision to remove
the domicile of the Company from Delaware and the United States to
Switzerland. This rash decision appears on its face to be related either
to (1) self-dealing motives of the controllers of the Company or
(2) mitigation of blatant violations of United States laws. These are all
serious issues in need of immediate investigation and give rise to
colorable claims of breach of fiduciary duties against the directors and
officers of the Company.
Id. Separately, the Demand reiterates:
[Plaintiff] has serious concerns about the Company’s decision to
remove the domicile of the Company from Delaware to Switzerland
without any justification. Additionally, these actions raise serious
questions whether the current officers and directors of the Company
have engaged in knowing violations of United States law prompting
this sudden attempt to remove the Company’s assets from the United
States to Switzerland.
Id. at 2-3. The Demand identifies fourteen categories of information that Plaintiff
seeks to inspect to accomplish his investigation purpose. See id. at 2.
On July 7, 2023, the Company, through counsel, sent Plaintiff a letter rejecting
the Demand. 220 Compl., Ex. 2 at 3.
B. The Plenary Action
Two weeks after sending the Demand, on July 14, 2023, Plaintiff filed a
Verified Complaint (the “Plenary Complaint”), accompanied by a Motion to
Expedite and a Motion for Temporary Restraining Order, in the Plenary Action. The
Plenary Complaint alleges ten counts, including claims for breach of fiduciary duty,
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breach of contract, waste, and “oppression of minority shareholder,” among others.
Throughout 58 pages and 313 numbered paragraphs, the Plenary Complaint
describes the founding of the Company, alleged securities law violations committed
by the Company’s directors and officers, Plaintiff’s purportedly improper removal
as CEO and a director in July 2020, and an allegedly improper asset sale in
September 2020. Additionally, the Plenary Complaint challenges wrongdoing in
connection with the Redomestication Transaction, alleging:
• “[Plaintiff] is seeking declaratory and injunctive relief related to a
proposed merger by [Archblock] designed to redomicile the company
to Switzerland. [Plaintiff] alleges this merger attempt in June 2023 is
an effort by the Defendants to further entrench their control and
ownership at the expense of [Plaintiff’s] shareholder rights. The
complaint seeks to enjoin and declare the proposed merger invalid as a
violation of Delaware law and [Archblock’s] charter.” Pl.’s Verified
Compl., C.A. No. 2023-0715-LWW [hereinafter, “Plenary Compl.”] ¶¶
16-18, Dkt. 1.
• “The above merger attempt—which [Plaintiff] was notified of less than
a month ago—to domicile the company and all assets to Switzerland
has prompted [Plaintiff] to file this complaint now in Delaware.” Id.
¶ 174.
• “As Directors and Officers of the Company, the Individual Directors
owed duties of loyalty to the stockholders of the Company, including
Plaintiff. The Individual Defendants breached their duties by
approving the merger agreement to benefit themselves and without any
justification. The Individual Defendants failed to follow any of the
prescribed rules under Delaware law, the Company’s Certificate of
Incorporation, or the Company’s Bylaws for the approval of such a
merger in a rush to enrich themselves.” Id. ¶¶ 283-284.
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• “The Company and the Individual Defendants have failed to follow the
prescriptions to approve and merge the Company under Delaware, the
Company’s Certificate of Incorporation, and the Company’s Bylaws.
. . . Plaintiff is entitled to a Declaration that the proposed merger
contravenes the law and should be enjoined from consummation.” Id.
¶¶ 286, 288.
Through the accompanying Motion for Temporary Restraining Order, Plaintiff
sought to enjoin the closing of the Redomestication Transaction.
The Plenary Action is assigned to Vice Chancellor Will. On July 21, 2023,
Vice Chancellor Will held a hearing on the Motion to Expedite and the Motion for
Temporary Restraining Order. At the conclusion of the hearing, the Court denied
the motions, explaining that Plaintiff had not raised a colorable challenge to the
Redomestication Transaction, and, even if the Court were to overlook the conclusory
nature of Plaintiff’s allegations, Plaintiff failed to demonstrate that he faced
imminent, irreparable harm in the absence of injunctive relief, or that the balance of
the equities favored enjoining the transaction. An v. Cosman, C.A. No. 2023-0715-
LWW, at 49-56 (Del. Ch. July 21, 2023) (TRANSCRIPT).
C. The 220 Action
On July 25, 2023, Plaintiff filed a letter in the Plenary Action, which the Court
interpreted as a request for reargument. That request was denied on August 4, 2023.
See An v. Cosman, C.A. No. 2023-0715-LWW (Del. Ch. Aug. 4, 2023) (ORDER).
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The same day Plaintiff filed his request for reargument, Plaintiff initiated this
action through the filing of the 220 Complaint, which seeks an order compelling
Archblock to produce the books and records identified in the Demand.
On September 11, 2023, Archblock moved to dismiss the 220 Complaint (the
“Motion to Dismiss”),1 and on September 27, 2023, filed an Opening Brief in
Support of its Motion to Dismiss Plaintiff’s Verified Complaint. Def. Archblock,
Inc.’s Op. Br. In Supp. Of Its Mot. To Dismiss Pl.’s Verified Compl. [hereinafter,
“OB”], Dkt. 10. On October 23, 2023, Plaintiff filed a Brief in Opposition to
Defendant’s Motion to Dismiss. Pl.’s Br. In Opp’n To Def.’s Mot. To Dismiss
[hereinafter, “AB”], Dkt. 17. Archblock filed a Reply Brief in Further Support of
its Motion to Dismiss Plaintiff’s Verified Complaint on November 6, 2023. Def.
Archblock, Inc.’s Reply In Further Supp. Of Its Mot. To Dismiss Pl.’s Verified
Compl. [hereinafter, “RB”], Dkt. 18. Oral argument on the Motion to Dismiss is
unnecessary.
1
Plaintiff complains that the Motion to Dismiss was untimely. See AB at 11-12. However,
Plaintiff did not move for default judgment, and even if he had, default is inappropriate
given Archblock’s eventual appearance and the lack of prejudice caused by its minor delay.
See, e.g., Hall v. Coupe, 2015 WL 832437, at *1 (Del. Ch. Feb. 25, 2015) (“[L]itigation on
the merits instead of entry of a default judgment is the preferred method for resolving a
case.”).
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II. ANALYSIS
Archblock has moved to dismiss the 220 Complaint under Court of Chancery
Rule 12(b)(6) for failure to state a claim upon which relief may be granted. When
reviewing a motion to dismiss under Rule 12(b)(6), Delaware courts “(1) accept all
well pleaded factual allegations as true, (2) accept even vague allegations as ‘well
pleaded’ if they give the opposing party notice of the claim, [and] (3) draw all
reasonable inferences in favor of the non-moving party.” Cent. Mortg. Co. v.
Morgan Stanley Mortg. Cap. Hldgs. LLC, 27 A.3d 531, 535 (Del. 2011). “[T]he
governing pleading standard in Delaware to survive a motion to dismiss is
reasonable ‘conceivability.’” Id. at 537.
“To inspect books and records under Section 220, a plaintiff must establish
by a preponderance of the evidence that the plaintiff is a stockholder, has complied
with the statutory form and manner requirements for making a demand, and has a
proper purpose for conducting the inspection.” Pettry v. Gilead Scis., Inc., 2020 WL
6870461, at *9 (Del. Ch. Nov. 24, 2020). “If a stockholder meets these requirements,
the stockholder must then establish ‘that each category of the books and records
requested is essential and sufficient to the stockholder’s stated purpose.’” Id.(citations omitted).
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Archblock contends that the 220 Complaint must be dismissed as a matter of
law because Plaintiff has already filed a plenary action challenging the same
purported wrongdoing that he seeks to investigate through the Demand. “Delaware
courts have recognized that a stockholder who files a plenary action asserting claims
of mismanagement undercuts his alleged need to obtain documents under Section
220 to investigate the same alleged acts of mismanagement.” Schnatter v. Papa
John’s Int’l, Inc., 2019 WL 194634, at *11 (Del. Ch. Jan. 15, 2019), abrogated on
other grounds by Tiger v. Boast Apparel, Inc., 214 A.3d 933 (Del. 2019). When a
stockholder files a plenary action challenging the same issues he seeks to investigate
through his demand, he “effectively concede[s] that the books and records he seeks
are not necessary or essential to his stated purpose of investigating mismanagement
or wrongdoing . . . .” Bizzari v. Suburban Waste Servs., Inc., 2016 WL 4540292, at
*6 (Del. Ch. Aug. 30, 2016).2 Moreover, “once a stockholder commences plenary
2
See also, e.g., King v. VeriFone Hldgs., Inc., 12 A.3d 1140, 1148 (Del. 2011)
(acknowledging that dismissal of a later-filed Section 220 action was proper when the
“stockholder-plaintiff’s plenary derivative complaint was still pending and the plenary
court had not granted the plaintiff leave to amend”); CHC Invs., LLC v. FirstSun Cap.
Bancorp, 2019 WL 328414, at *5 (Del. Ch. Jan. 24, 2019) (recognizing that, absent
“special circumstances, the problems inherent in parallel plenary and Section 220 actions
defeat [a plaintiff’s] purpose for inspection”); Cent. Laborers Pension Fund v. News Corp.,
2011 WL 6224538, at *2 (Del. Ch. Nov. 30, 2011) (concluding that a stockholder was
“unable to tender a proper purpose for pursuing its efforts to inspect” books and records
because its “currently-pending derivative action necessarily reflect[ed] its view that it had
sufficient grounds for alleging both demand futility and its substantive claims without the
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litigation, discovery rules dictate what information relevant to its claims the
stockholder may receive and when the stockholder may receive that information.
Using Section 220 inspections to investigate pending plenary claims undermines
well-established discovery law.” CHC Invs., LLC, 2019 WL 328414, at *2.3
Plaintiff raises several arguments in opposition to the Motion to Dismiss.
None succeed.
First, Plaintiff contends “there is significant difference between the purpose
and the requested documents in the Section 220 demand and action and the Breach
need for the assistance afforded by Section 220”), aff’d, 45 A.3d 139 (Del. 2012); Baca,
2010 WL 2219715, at *4 (“[A] stockholder does not act with a proper purpose when the
stockholder attempts to use Section 220 to investigate matters that the same stockholder
already put at issue in a plenary derivative action.”); Taubenfeld v. Marriott Int’l, Inc.,
2003 WL 22682323, at *3 (Del. Ch. Oct. 28, 2003) (explaining that filing a derivative
action “was a certification under Rule 11 that the plaintiffs had enough information to
support their allegations”).
3
See also Amalgamated Bank v. NetApp, Inc., 2012 WL 379908, at *7 (Del. Ch. Feb. 6,
2012) (explaining that Section 220 cannot be used as “a device for parallel discovery to be
pursued in two jurisdictions”); Cent. Laborers Pension Fund, 2011 WL 6224538, at *1
(“Section 220 was not adopted as a substitute for litigation discovery . . . .”), aff’d, 45 A.3d
139 (Del. 2012); Romero v. Career Educ. Corp., 2005 WL 3112001, at *3 (Del. Ch. Nov.
4, 2005) (“Plaintiff is using this § 220 action to circumvent the stay of discovery in the
federal securities litigation, and therefore lacks a proper purpose.”); Beiser v. PMC-Sierra,
Inc., 2009 WL 483321, at *3 (Del. Ch. Feb. 26, 2009) (same); W. Coast Mgmt. & Cap.,
LLC v. Carrier Access Corp., 914 A.2d 636, 645 (Del. Ch. 2006) (“When, in dismissing
on demand excusal grounds, another court has denied discovery and leave to amend, it
would undermine that decision for this court to permit the same plaintiff to pursue a section
220 action solely targeted at gaining information to relitigate that prior determination. [The
plaintiff’s] purpose in this circumstance cannot be proper.”).
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of Contract and Fiduciary Duty claims in the [Plenary] [A]ction.”4 AB at 4. A
review of the Demand and the Plenary Complaint demonstrates otherwise. The
Demand asserts one purpose: to investigate possible wrongdoing in connection with
the Redomestication Transaction. Demand at 2-3. The Plenary Complaint likewise
alleges wrongdoing in connection with the Redomestication Transaction—it states
that the Redomestication Transaction “prompted [Plaintiff] to file this complaint”;
alleges that the transaction “is an effort by the Defendants to further entrench their
control and ownership at the expense of [Plaintiff’s] shareholder rights” and that
“[t]he Individual Defendants breached their duties by approving the merger
agreement”; and seeks “a Declaration that the [Redomestication Transaction]
contravenes the law and should be enjoined from consummation.” Plenary Compl.
¶¶ 16-18, 171-174, 283, 288. In other words, the Plenary Complaint challenges the
precise wrongdoing that Plaintiff seeks to investigate through the Demand.
Next, Plaintiff points out that the 220 Complaint identifies additional proper
purposes for inspection, including the valuation of Plaintiff’s shares. 220 Compl.
4
To support this argument, Plaintiff cites the Delaware Supreme Court’s decision in KT4
Partners LLC v. Palantir Technologies Inc., 203 A.3d 738 (Del. 2019). See AB at 4. The
facts of that case are not analogous—in KT4, “there was no prior litigation against [the
company] in Delaware related to the purposes [in the demand] that the Court of Chancery
found proper.” Id. at 762. Nor do the holdings in that case address the issues presented
here.
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¶ 16. The Demand itself does not include that purpose, however,5 and Plaintiff may
not expand his Demand through litigation. See Grimm v. Stem, Inc., 2014 WL
5319597, at *1, n.3 (Del. Ch. Oct. 13, 2014) (“During oral argument, [plaintiff]
articulated a new purpose for inspection: valuation of his stock in [the company].
. . . Because this purpose was not stated in the Demand, I declined to consider it in
resolving [plaintiff]’s summary judgment motion.”).6
Finally, Plaintiff argues this action presents “special circumstances” that
militate against dismissal. This Court has acknowledged that, “[d]espite problems
inherent in the ‘sue first, ask questions later’ sequence, in ‘special circumstances,’
5
The Demand seeks valuation information but does not identify valuation as a purpose for
making the Demand. See Demand at 1 (“In addition to requesting the mandatory
information and stockholders meeting date as required under the DGCL, I also seek to
investigate the events leading up to the approval and decision to remove the domicile of
the Company from Delaware and the United States to Switzerland.”); id. at 2-3 (stating,
under heading “Purpose,” that “[t]he Shareholder has serious concerns about the
Company’s decision to remove the domicile of the Company from Delaware to Switzerland
without any justification. Additionally, these actions raise serious questions whether the
current officers and directors of the Company have engaged in knowing violations of
United States law prompting this sudden attempt to remove the Company’s assets from the
United States to Switzerland”); see also id. at 2 (requesting “[d]ocuments evidencing the
valuation and/or the fairness of the valuation of the Company’s shares in the new Swiss
company”).
6
See also, e.g., Fuchs Fam. Tr. v. Parker Drilling Co., 2015 WL 1036106, at *4 (Del. Ch.
Mar. 4, 2015) (“Strict adherence to the section 220 procedural requirements for making an
inspection demand protects the right of the corporation to receive and consider a demand
in proper form before litigation is initiated.” (citation and internal quotation marks
omitted)).
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Delaware courts have enforced a stockholder’s Section 220 rights notwithstanding
the stockholder’s pending plenary complaint.” CHC Invs., LLC, 2019 WL 328414,
at *3 (citations omitted). In Khanna v. Covad Communications Group, Inc., for
example, a stockholder plaintiff filed suit to enforce his inspection rights under
Section 220, then one month later, brought a class and derivative action out of
concern that his claims would become time barred. 2004 WL 187274, at *3 (Del.
Ch. Jan. 23, 2004). Vice Chancellor Noble concluded that the plaintiff had not
waived his right to pursue his demand, explaining that “the overlap of the Section
220 action and the Derivative Action [had been] attributable to [the defendant’s]
failure to comply with its obligations under Section 220 . . . .” Id. at *4.
Plaintiff contends that, like in Khanna, “[i]mpending statute of limitations or
other events implicating plaintiff’s rights” justify Plaintiff’s parallel suits here. AB
at 7. But the limitations period on claims arising from the Redomestication
Transaction, which was approved on June 29, 2023, is not close to expiring.
Moreover, as the Court explained in CHC, “Khanna is limited to circumstances in
which timing pressures are caused by the defendant or, at least, not caused by the
plaintiff.” 2019 WL 328414, at *3. If Plaintiff means to argue that limitations
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pressures on his other claims justify parallel proceedings, he does not adequately
allege that any such timing pressures are of Archblock’s, and not his own, making.7
Plaintiff could have filed suit to enforce the Demand, but chose, instead, to
pursue plenary litigation to seek to enjoin the transaction. Having committed to that
course, Plaintiff cannot use Section 220 to circumvent the discovery process in the
Plenary Action. That does not mean Plaintiff is without a remedy; he can pursue
discovery in the Plenary Action, if and when appropriate.
III. CONCLUSION
For the reasons explained above, I recommend that the Motion to Dismiss be
granted and the 220 Complaint be dismissed with prejudice. This is a final report
7
In CHC, the Court recognized another exception—articulated in King v. VeriFone
Holdings, Inc.—where “a court has deemed the plenary complaint insufficient and
permitted a stockholder to re-plead or amend.” CHC Invs., LLC, 2019 WL 328414, at *4-
5. Here, however, the Plenary Action has not been dismissed with leave to replead or
amend; it remains pending. The King exception therefore does not apply.
Additionally, as the Court explained in CHC, “Khanna and King are distinguishable
because both involved derivative claims that import policy considerations not implicated
by” claims that are not brought derivatively or in a representative capacity. Id. at *5.
Plaintiff’s claims in the Plenary Action are brought on an individual basis, so the “special
circumstances” identified in Khanna and King arguably do not apply at all.
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pursuant to Court of Chancery Rule 144(d)(2), and exceptions may be filed within
three business days.8
Sincerely,
/s/ Bonnie W. David
Bonnie W. David
Magistrate in Chancery
cc: All counsel of record (by File & ServeXpress)
8
See Ct. Ch. R. 144(d)(2) (“In actions that are summary in nature or in which the Court
has ordered expedited proceedings, any party taking exception shall file a notice of
exceptions within three days of the date of the report.”) (emphasis added).