Jennifer Barnes v. Sprouts Farmers Market, Inc.

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
JENNIFER BARNES, )
)
Plaintiff, )
)
v. ) C.A. No. 2017-0735-MTZ
)
SPROUTS FARMERS MARKET, INC., )
)
Defendant. )
MASTER’S REPORT
Date Submitted: April 5, 2018
Draft Report: May 2, 2018
Final Report: July 18, 2018
Blake A. Bennett, Esquire, of COOCH AND TAYLOR, P.A., Wilmington,
Delaware; OF COUNSEL: Brian J. Robbins, Esquire, Felipe J. Arroyo, Esquire,
and Steven R. Wedeking, Esquire, of ROBBINS ARROYO LLP, San Diego, CA;
Attorneys for Plaintiff.
S. Mark Hurd, Esquire and Alexandra M. Cumings, Esquire, of MORRIS,
NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; OF COUNSEL:
Michael D. Blanchard, Esquire, of MORGAN, LEWIS & BOCKIUS LLP,
Hartford, CT; Attorneys for Defendant.
ZURN, Master
This case involves a demand to inspect the books and records of a grocery
store chain that allegedly failed to disclose that it was experiencing significant
produce deflation at the time of a stock offering. The plaintiff seeks to inspect the
company’s books and records in order to investigate potential breaches of duty,
corporate mismanagement, wrongdoing, and unjust enrichment by the company’s
fiduciaries. The defendant argues the plaintiff is not entitled to inspection because
she has not shown a credible basis to infer wrongdoing or mismanagement.
In this post-trial final report, I conclude the plaintiff has established a
credible basis from which a court can infer that wrongdoing or mismanagement
may have occurred.
I. Background1
Plaintiff Jennifer Barnes (“Plaintiff”) alleges she is a stockholder of
Defendant Sprouts Farmers Market, Inc. (“Sprouts”), and has been at all relevant
times. 2 Sprouts, a Delaware corporation, is a grocery store chain offering fresh,
natural, and organic food, including fresh produce, bulk foods, vitamins and
supplements, packaged groceries, meat and seafood, deli, baked goods, dairy
1
The facts in this report reflect my findings based on the parties’ briefing, appended exhibits,
and trial on that paper record held on February 23, 2018. I grant the evidence the weight and
credibility that I find it deserves. Citations to the trial transcript are in the form “Tr. #.”
Plaintiff’s exhibits, submitted in support of Plaintiff’s pretrial briefs, are cited as “PX #,” and
Defendant’s exhibits, submitted in support of Defendant’s pretrial briefs, are cited as “DX #.”
2
For purposes of this report, the defendant has not disputed Plaintiff’s standing as a stockholder.
products, frozen foods, beer and wine, natural body care, and household items. 3
Sprouts seeks to distinguish itself by offering fresh, high quality produce at low
prices, and produce sales generate approximately twenty-five percent of Sprouts’
revenue. 4 Sprouts was founded in 2002 and as of November 1, 2017, comprised
285 stores in fifteen states.5
Nonparty Apollo Global Management is an investment fund that is affiliated
with and manages funds called AP Sprouts Holdings, LLC and AP Sprouts
Holdings (Overseas) LP. I refer to all three entities collectively as “Apollo.”
Nonparty Andrew S. Jhawar (“Jhawar”) is a senior partner of Apollo Global
Management and the chairman of Sprouts’ board.6
Sprouts held its initial public offering (“IPO”) on August 1, 2013. 7
Immediately prior to Sprouts’ IPO, Apollo owned over fifty percent of Sprouts’
stock. 8 In contemplation of the IPO, Sprouts granted Apollo the right to require
Sprouts to file up to five registration statements with the SEC for the resale of
Apollo’s Sprouts stock. 9 After the IPO, Apollo held 44.5% of Sprouts’ stock.10
3
PX E at 5.
4
PX F at 6; PX G at 2; PX H at 24.
5
PX E at 17.
6
PX I at 6.
7
Id.
8
Id.
9
PX J at 9.
10
Id.
2
Apollo sold a majority of that stock in four registered secondary offerings in
November of 2013, March of 2014, August of 2014, and November of 2014.11
Apollo sold its remaining 10.4% of Sprouts stock in a fifth and final
secondary offering (“the Secondary Offering”), which opened on March 6, 2015. 12
The offering documents include a SEC Form S-1 registration statement and a
prospectus, filed on March 4, 2015.13 The offering documents were signed by
numerous officers and directors, including Jhawar as chairman of Sprouts’ board
and as an Apollo vice president.14 Sprouts disclosed Jhawar’s dual roles in
connection with the Secondary Offering.15 The Secondary Offering closed on
March 10, 2015.16 Apollo sold all its remaining shares at $35.30 per share, raising
nearly $560 million in gross proceeds.17 Apollo was the only investor who sold in
the Secondary Offering.18
In mid-February 2015, Sprouts began experiencing produce deflation.19 The
Secondary Offering documents filed on March 4, 2015, did not mention this
deflation. The Secondary Offering’s registration statement incorporated Sprouts’
11
PX I at 6.
12
PX I.
13
Id.
14
Id.
15
Id. at 6.
16
PX K.
17
Id.
18
PX I at 6.
19
PX L at 3, 8; PX M at 3.
3
2014 Annual Report on Form 10-K dated February 26, 2015.20 The 10-K disclosed
the importance of produce, its volatile pricing, and that volatility’s general impact
on Sprouts’ business, as follows:
[I]nflation or deflation can impact our business. Food deflation
could reduce sales growth and earnings, while food inflation,
combined with reduced consumer spending, could reduce gross profit
margins.21
…
Inflation and deflation in the prices of food and other products
we sell may periodically affect our sales, gross profit and gross
margin. The short-term impact of inflation and deflation is largely
dependent on whether or not the effects are passed through to our
customers, which is subject to competitive market conditions. In the
first half of fiscal 2012, we experienced produce price deflation,
which contributed to higher gross margins in our business during that
period and the full fiscal year.
Food inflation and deflation is affected by a variety of factors
and our determination of whether to pass on the effects of inflation or
deflation to our customers is made in conjunction with our overall
pricing and marketing strategies. Although we may experience
periodic effects on sales, gross profit and gross margins as a result of
changing prices, we do not expect the effect of inflation or deflation to
have a material impact on our ability to execute our long-term
business strategy. 22
Sprouts’ financial results for the first quarter of 2015, reported on May 7,
2015, included lower gross profit margins and sales growth slightly below the
20
PX I at 19.
21
PX H at 25.
22
Id. at 61.
4
projected guidance level for the quarter.23 Sprouts issued a press release that day
explaining the lower numbers were “primarily driven by produce tightness due to
adverse weather conditions and West Coast port strikes that limited product
availability.” 24 On an earnings call that same day, Douglas Sanders (“Sanders”),
who was then serving as Sprouts’ Chief Executive Officer, President, and Director,
stated the lower sales growth was “primarily driven by 3 factors”: first, tightness
in produce quality and supply due to weather and port challenges; “[s]econd, we
began experiencing accelerating produce deflation in mid-February as supply
improved, which increased significantly throughout March;” and third, severe
weather in several markets that negatively impacted sales. 25 On that same call,
Amin N. Maredia (“Maredia”), who was then acting as Chief Financial Officer and
Treasurer, elaborated on the deflation: “[W]e began seeing in the middle of
February, acceleration and deflation in the produce area through the end of
February as well as all the way through March and continuing into April.”26
Two weeks later, at a conference on May 21, 2015, Maredia reiterated
Sprouts’ experience with price deflation in the first quarter of 2015. He explained:
And in the back half of the quarter, we saw something pretty unusual,
which we had not seen before, frankly, with the port issues, we started
to see a tremendous amount of deflation. In February, we saw huge
23
Compare DX D (providing guidance for the first quarter of 2015) with PX N and PX L; see
Ans. ¶ 20.
24
PX N.
25
PX L at 3.
26
Id. at 8.
5
deflation in certain categories, which could not get outside United
States. And then when the port issue was resolved, we saw a glut of
product come into the United States, which caused significant
deflation in that category. 27
The deflation continued. On August 6, 2015, Sprouts announced its results
for the second quarter of 2015 28 and held a conference call. 29 Sanders, then
serving as Executive Chairman, noted the growth Sprouts achieved in that quarter
“was offset by a deflation of nearly 10% in April.”30 Sanders described the
deflation as “significant” and acknowledged produce deflation “has a greater
impact on Sprouts due to the high volume of produce we sell.”31 James L. Nielson,
then serving as President and Chief Operating Officer, stated deflation had not
subsided like Sprouts had predicted it would. 32 And Maredia stated that deflation
“hurt our comps by nearly 200 basis points in sort of May and June as we sort of
ended the quarter.”33
On March 24, 2016, an investor brought a class action lawsuit against
Sprouts and an array of its officers and directors, including Sanders, Maredia, and
Jhawar, in Arizona state court (“the Arizona Action”). The complaint in the
27
PX M at 3. I interpret this statement to mean that issues with one or more shipping port(s)
trapped produce inside the United States and created a glut of produce that could not enter the
United States, and that both of these phenomena contributed to deflation.
28
PX O.
29
PX P.
30
Id. at 3.
31
Id.
32
Id. at 9.
33
Id.
6
Arizona Action (“the Arizona Complaint”) alleges Sprouts violated Section 11 of
the Securities Act of 1933 by failing to disclose Sprouts was suffering from a
produce deflation trend at the time of the Secondary Offering. 34 Specifically, the
Arizona Complaint asserts that at the time of the Secondary Offering, the deflation
was a known trend required to be disclosed under Item 303 of SEC Regulation S-
K, 17 C.F.R. § 229.303(a)(3)(ii) (“Item 303”). Item 303 requires a registrant to
“[d]escribe any known trends or uncertainties that have had or that the registrant
reasonably expects will have a material favorable or unfavorable impact on net
sales or revenues or income from continuing operations.” The Arizona Complaint
relies on the statements Sprouts made about deflation and its effects after the
Secondary Offering as set forth above, including Sprouts’ May 7, 2015, press
release; the statements by Sanders and Maredia on the May 7, 2015 earnings call;
Maredia’s May 21, 2015, statements; and the statements by Sanders and Nielson
on the August 6, 2015, earnings call.35 Sprouts moved to dismiss the Arizona
Complaint.
On August 25, 2017, the Arizona court denied Sprouts’ motion to dismiss
the Section 11 claim. 36 The Arizona court noted it was applying “ordinary notice
34
PX Q.
35
Id., ¶¶ 45-49.
36
PX R. The Arizona court dismissed other claims against Sprouts under Sections 12 and 15 of
the Securities Act. Id. at 11.
7
pleading” standards, assuming the truth of all well-pleaded factual allegations and
indulging all reasonable inferences from those facts. 37 The Arizona court noted the
alleged “known trend” of deflation “started a mere 18 days before the offering,”
and concluded that whether the 18-day produce price deflation was a “known trend
or simply a periodic price fluctuation is an issue ill-suited to be resolved by a
motion to dismiss on an undeveloped record.” 38 The court reviewed the statements
by Sprouts’ officers and directors regarding deflation after the Secondary Offering
under Arizona’s pleading standards and concluded they “could be read to mean
that Sprouts was aware of a trend” at the time of the Secondary Offering.39 “Read
liberally, these statements support plaintiff’s claims that the February deflation was
something more than a periodic price fluctuation.”40 The Arizona court also
concluded that under motion to dismiss standards, the Arizona Complaint gave fair
notice of the claim that Sprouts knew of the price deflation “in February.” 41
Accordingly, the Arizona court denied the motion to dismiss the Section 11 claim
against Sprouts. 42
37
Id. at 4.
38
Id. at 7, 8.
39
Id. at 9.
40
Id.
41
Id. at 9-10.
42
Id. at 11.
8
The case pending in this Court began when Plaintiff sent Sprouts an undated
demand for books and records that Sprouts received on March 1, 2017.43
Plaintiff’s stated purpose “is to investigate potential breaches of duty, corporate
mismanagement, wrongdoing, and unjust enrichment by fiduciaries of [Sprouts],
including Sprouts’ Board.” 44 Plaintiff states that upon reviewing the demanded
records, she may seek an audience with Sprouts’ board of directors or pursue
litigation. 45
Sprouts rejected Plaintiff’s demand for books and records by letter dated
March 17, 2017, arguing Plaintiff lacked a proper purpose. 46 On October 17, 2017,
Plaintiff filed a verified complaint under 8 Del. C. § 220. When Plaintiff filed this
action, Sprouts’ stock traded at approximately $18.60 per share.47 Sprouts
answered the complaint on November 6, 2017.
The parties stipulated the proceedings would be bifurcated into two stages:
a first stage, on the issue of whether Plaintiff has shown a proper purpose, to be
adjudicated on a paper record; and a potential second stage for conferring and
potential adjudication on production of documents. The first stage went to trial on
February 28, 2018. On April 4 and 5, 2018, the parties submitted requested
43
PX A; PX B.
44
PX A at 1.
45
Id.
46
See PX C.
47
Pl.’s Decl. of Blake Bennett ¶ 3.
9
supplemental briefing. I issued a draft report on May 2, 2018. Sprouts took
exception, and the parties briefed those exceptions. This is my final report.
II. Analysis
Under Section 220 of the Delaware General Corporation Law, stockholders
of a Delaware corporation have the right to inspect the books and records of a
company for any proper purpose.48 A proper purpose includes “a purpose
reasonably related to such person’s interest as a stockholder.”49 “[A] stockholder
has the burden of proof to demonstrate a proper purpose by a preponderance of the
evidence.”50
“It is well established that a stockholder’s desire to investigate wrongdoing
or mismanagement constitutes a ‘proper purpose.’” 51 The stockholder is not,
however, “required to prove by a preponderance of the evidence that waste and
[mis]management are actually occurring.”52 Instead, a plaintiff who seeks to
investigate wrongdoing or mismanagement must show “‘some evidence’ to suggest
a ‘credible basis’ from which a court can infer that mismanagement, waste or
wrongdoing may have occurred.”53 The “‘credible basis’ standard sets the lowest
48
8 Del. C. § 220.
49
8 Del. C. § 220(b).
50
Seinfeld v. Verizon Commc’ns, Inc., 909 A.2d 117, 121 (Del. 2006).
51
Id.
52
Id. at 123 (quoting Thomas & Betts Corp. v. Leviton Mfg. Co. Inc., 681 A.2d 1026, 1031 (Del.
1996)).
53
Id. at 118.
10
possible burden of proof.” 54 The credible basis standard can be satisfied through
“documents, logic, testimony or otherwise.” 55
Plaintiff seeks Sprouts’ books and records for the purpose of investigating
potential wrongdoing, including potential breaches of fiduciary duty. She claims
this Court can infer that Sprouts’ directors and officers engaged in wrongdoing by
failing to disclose that produce deflation was harming Sprouts at the time of the
Secondary Offering. Plaintiff argues Sprouts’ managers’ statements in the spring
and summer of 2015, that “we began seeing” “huge” and “significant” deflation in
February 2015, allow the Court to infer Sprouts’ fiduciaries knowingly failed to
disclose Sprouts was experiencing material deflation at the time of the March 4
Secondary Offering. 56 Plaintiff also argues an inference of wrongdoing is
supported by the significance of produce and its volatile pricing to Sprouts’
business, the fact that Apollo orchestrated the Secondary Offering for its own
benefit, and by Jhawar’s dual roles as an Apollo senior partner and chairman of
Sprouts’ board. Plaintiff concludes the Secondary Offering documents violate the
Securities Act of 1933 under Item 303 by “fail[ing] to disclose a known trend in
54
Id. at 123.
55
Id.
56
See PX L at 3; PX L at 8; PX M at 3.
11
the deflation of the price of produce and the deleterious effect on Sprouts that this
deflation would cause.” 57
Sprouts interprets Sprouts’ statements in the spring and summer of 2015 as
backward-looking descriptors of past conditions, which fail to show Sprouts’
management had contemporaneous knowledge of those conditions at the time of
the Secondary Offering. Sprouts notes that pricing data necessarily trails the
occurrence of pricing fluctuation.58 Sprouts also argues that the use of the pronoun
“we” does not identify (and therefore incriminate) officers or directors, but rather,
refers to the company as a whole. Sprouts concludes Plaintiff failed to meet her
burden because she fails to demonstrate Sprouts’ directors or officers knew Sprouts
was experiencing the deflation that began in mid-February when they signed the
Secondary Offering documents dated March 4. Sprouts further contends Plaintiff
has failed to show Sprouts’ fiduciaries knew, or could even predict, the deflation
would harm Sprouts. Sprouts also argues that neither Apollo’s presence on the
board, nor its role in arranging the Secondary Offering, supports an inference of
wrongdoing because the other Sprouts officers and directors, who were unaffiliated
with Apollo, would have had to engage in wrongdoing to benefit Apollo against
57
Compl. ¶ 3. This Court cannot determine whether false disclosures violated federal securities
law, but it can conclude that those disclosures constitute credible evidence of possible
wrongdoing and mismanagement. Somerville S. Trust v. USV Partners, LLC, 2002 WL
1832830, at *6 (Del. Ch. Aug. 2, 2002).
58
DX G, H (noting government pricing reports provide preliminary pricing data after one
month).
12
common sense and logic. Sprouts argues that the two-week deflationary period
prior to the Secondary Offering cannot, as a matter of law, constitute a “trend”
under Item 303. Sprouts uses the elements of a breach of duty of disclosure claim
under Malone v. Brincat to frame its arguments.59
Before considering Sprouts’ arguments, I must first determine whether they
are premature merits-based defenses, or whether they strike at the evidence and
logic Plaintiff offers as a basis for inferring possible wrongdoing. 60 This Court has
repeatedly stated that a Section 220 proceeding does not warrant a trial on the
merits of underlying claims. 61 Indeed, “the Delaware Supreme Court has made it
clear that the public policy of this State is to encourage stockholders to utilize
Section 220 before filing a derivative action … in order to meet the heightened
59
722 A.2d 5 (Del. 1998).
60
This issue was the focus of the parties’ briefing on Sprouts’ exceptions to my draft report.
61
E.g., Lavin v. W. Corp., 2017 WL 6728702, at *1 (Del. Ch. Dec. 29, 2017) (“Any contrary
finding would invite defendants improperly to draw the court into adjudicating merits defenses to
potential underlying claims in order to defeat otherwise properly supported Section 220
demands.”); Okla. Firefighters Pension & Ret. Sys. v. Citigroup Inc., 2014 WL 5351345, at *6
(Del. Ch. Sept. 30, 2014) [hereinafter Citigroup] (“Although Citigroup disclaims any effort to
turn this proceeding into a trial on the merits of Plaintiffs possible derivative claims, Citigroup
essentially seeks that result by implying that Plaintiff must have specific, tangible evidence that
Citigroup’s Board or senior management was complicit in the fraud at Banamex. That argument
ignores the inferences that this Court can—and must—draw under the credible basis standard,
and would discourage the very behavior this Court has sought to encourage among would-be
derivative or class plaintiffs.”); La. Mun. Police Emps.’ Ret. Sys. v. Countrywide Fin. Corp.,
2007 WL 2896540, at *12 (Del. Ch. Oct. 2, 2007) [hereinafter Countrywide] (rejecting, in a
Section 220 proceeding, an argument that no springloading ever occurred because “by raising
such a defense, Countrywide seeks to litigate the ultimate issue in a possible future derivative
suit that might eventually be filed by [Plaintiff]. This is neither the time nor the procedural
setting to address that issue.”).
13
pleading requirements … applicable to such actions.”62 “Delaware courts
generally do not evaluate the viability of the demand based on the likelihood that
the stockholder will succeed in a plenary action.” 63 In a books and records action,
this Court considers only those arguments from a defendant that inform whether
the plaintiff’s evidence provides a credible basis for the Court infer possible issues
of wrongdoing. 64
In Countrywide, the Court parsed the defendant’s arguments into those it
could consider in determining whether the plaintiff had established a credible basis
from which a court could infer wrongdoing, and those it could not consider
because they went to whether wrongdoing actually occurred.65 In that case, the
plaintiff presented an expert who had developed a statistical model that he believed
indicated, with statistical significance, that some type of option manipulation may
have occurred. 66 The defendant presented its own expert, who presented two
counterarguments: a critique of the plaintiff’s expert’s methodology, and
affirmative evidence seeking to prove that springloading was not possible in that
case and therefore could not constitute a credible basis to infer possible
wrongdoing.67 The Court entertained the first argument, describing it as
62
Freund v. Lucent Techs., 2003 WL 139766, at *4 (Del. Ch. 2003) (emphasis added).
63
Lavin, 2017 WL 6728702, at *9.
64
Countrywide, 2007 WL 2896540, at *12.
65
See id.
66
Id.
67
Id. at *7.
14
undercutting the testimony and analysis of the plaintiff’s expert, but ultimately
concluded the plaintiff’s expert’s analysis was not so fundamentally flawed as to
be rejected. 68 The Court rejected the defendant’s evidence that springloading
could not have occurred, because that evidence went to the issue of whether
wrongdoing actually occurred, not whether the plaintiff’s analysis provided a
credible basis to infer possible wrongdoing. 69
In determining whether Plaintiff has established a credible basis from which
the Court could infer possible wrongdoing, I will consider Sprouts’ argument that
the managers’ statements are not fairly read to indicate they had contemporaneous
knowledge of deflation conditions at the time of the Secondary Offering. This is
akin to Countrywide’s attack on the plaintiff’s expert’s methodology. Sprouts’
argument hinges on the meaning of the managers’ phrases, such as “we began
seeing” and “we saw.” Sprouts and Plaintiff disagree on to whom “we” refers, and
what level and timing of knowledge is imputed by “began seeing.”
As Sprouts points out, Plaintiff’s interpretation, under which “we” refers to
the managers and “began seeing” imputes personal knowledge to the managers at
least as of the Secondary Offering, is not ironclad. But at this stage it does not
need to be: the statements, together with the rest of Plaintiff’s allegations, need
68
Id. at *11-12.
69
Id. at *12.
15
only provide some evidence from which I can infer that wrongdoing possibly
occurred. Sprouts’ countervailing interpretation does not convince me to reject
Plaintiff’s. I conclude a court could interpret the statements as Plaintiff does, and
infer possible wrongdoing.
In my view, the rest of Sprouts’ arguments are merits defenses, akin to the
arguments that wrongdoing could not have occurred that were dismissed in
Countrywide. Sprouts offers its own affirmative evidence in the form of
government pricing data to attempt to show that its managers could not have had
contemporaneous knowledge of deflation at the time of the Secondary Offering.
Sprouts further argues its managers could not have predicted that deflation would
continue or harm Sprouts. Finally, Sprouts argues its managers would not have
made an inadequate disclosure to benefit Apollo.
All of these arguments go to whether or not wrongdoing actually occurred: if
the managers did not and could not have known about the deflation and its future
effects, they cannot have committed wrongdoing in failing to disclose it. Sprouts’
argument that Plaintiff failed to show Sprouts’ managers knew about the deflation
and its effects, and that the managers intended to misinform, also resembles the
merits-based argument discarded in Citigroup: “that a stockholder must have
specific and concrete evidence of possible wrongdoing or mismanagement by the
board or senior management before the Court may permit a Section 220
16
inspection.”70 Sprouts even aligns these arguments with the elements of a duty of
disclosure claim under Malone v. Brincat.71 The inquiry is not whether Plaintiff
has shown a credible basis to infer all the elements of a specific claim, but rather,
general wrongdoing. 72 I conclude Sprouts’ arguments as to what the managers
could or would have known, predicted, or done, are premature merits-based
arguments.
Even if I accepted Sprouts’ merits-based arguments as attacks on the
evidentiary support and logic underpinning Plaintiff’s credible basis theory,
Plaintiff’s low burden of proof would compel the same result. Plaintiff need only
provide some evidence to allow an inference of possible wrongdoing. In my view,
the managers’ statements interpreted as Plaintiff suggests, made in the context of
incredible deflation in an area essential to Sprouts’ business, and in the context of
Apollo’s presence on the board, allows such an inference. Connecting the dots
Plaintiff offers sketches out wrongdoing. That sketch might be more complete
with additional dots, such as the managers’ prediction that the deflation would
continue and be material, or the managers’ motivation to aid Apollo in the
70
See 2014 WL 5351345, at *6.
71
Def. Op. Br. on Exceptions at 3 (citing Malone v. Brincat, 722 A.2d 5 (Del. 1998)).
72
The distinction between a specific claim and general wrongdoing is particularly meaningful in
this case, where the claim used to define the alleged wrongdoing was identified by the defendant,
not the plaintiff.
17
Secondary Offering and intent to misinform. But I can connect the dots Plaintiff
did offer, so I conclude Plaintiff has met her low burden.
Finally, I address Plaintiff’s reliance on the Arizona court’s denial of the
motion to dismiss the Arizona Complaint, which was based on the same allegations
and evidence presented in this case. The parties agree that a shareholder seeking
books and records fails to state a credible basis for the Court to infer wrongdoing
when the plaintiff relies solely on the fact that others have sued the company. 73
The parties also agree that in this Court’s recent decision in In re UnitedHealth
Group, Inc. Section 220 Litigation, the Court reviewed the plaintiff’s proffered
evidence of wrongdoing without regard for a different court’s denial of a motion to
dismiss based on the same evidence and allegations. 74 Taking instruction from
UnitedHealth, the Arizona court’s denial of the motion to dismiss does not alter
my conclusion in this case.
73
See Graulich v. Dell, 2011 WL 1843813, at *5 n.49 (Del. Ch. May 16, 2011).
74
2018 WL 1110849, at *7 n.91 (Del. Ch. Feb. 28, 2018).
18
III. Conclusion
For the foregoing reasons, I recommend the Court find Plaintiff has
demonstrated a proper purpose for her demand for Sprouts’ books and records.
This is a final report pursuant to Court of Chancery Rule 144.
Respectfully,
/s/ Morgan T. Zurn
Master in Chancery
19