Todd Swift v. Houston Wire & Cable Company

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
TODD SWIFT, )
)
Plaintiff, )
)
v. ) C.A. No. 2021-0525-LWW
)
HOUSTON WIRE & CABLE )
COMPANY, )
)
Defendant. )
MEMORANDUM OPINION
Date Submitted: September 22, 2021
Date Decided: December 3, 2021
Blake A. Bennett, COOCH AND TAYLOR P.A., Wilmington, Delaware; W. Scott
Holleman and Garam Choe, BRAGAR EAGEL & SQUIRE, P.C., New York, New
York; Counsel for Plaintiff Todd Swift
Mark Hurd and Miranda Gilbert, MORRIS, NICHOLS, ARSHT, & TUNNELL
LLP, Wilmington, Delaware; Kayvan Sadeghi, SCHIFF HARDIN LLP, New York,
New York; Jin Yan, SCHIFF HARDIN LLP, Chicago, Illinois; Counsel for
Defendant Houston Wire & Cable Company
WILL, Vice Chancellor
The plaintiff is a former stockholder of Houston Wire & Cable Company. He
filed this action under Section 220 of the Delaware General Corporation Law hours
after a certificate of merger was submitted to the Delaware Secretary of State and a
merger agreement between Houston Wire and Omni Cable, LLC became effective.
Under the terms of the merger agreement, the plaintiff ceased to be a stockholder of
the company at that effective time.
Section 220(c) unambiguously requires that a plaintiff “is” a stockholder at
the time of filing a books and records action. But the plaintiff’s shares were
cancelled before he filed suit, causing him to lose standing. The defendant’s motion
to dismiss is therefore granted.
I. BACKGROUND
Unless otherwise noted, the following facts are based on the plaintiff’s
Verified Complaint and the documents it incorporates by reference.1 Any additional
1
Verified Compl. (“Compl.”) (Dkt. 1). See Winshall v. Viacom Int’l, Inc., 76 A.3d 808,
818 (Del. 2013) (“[A] plaintiff may not reference certain documents outside the complaint
and at the same time prevent the court from considering those documents’ actual terms.”
(quoting Fletcher Int’l, Ltd. v. ION Geophysical Corp., 2011 WL 1167088, at *3 n.17 (Del.
Ch. Mar. 29, 2011))); Freedman v. Adams, 2012 WL 1345638, at *5 (Del. Ch. Mar. 30,
2012) (“When a plaintiff expressly refers to and heavily relies upon documents in her
complaint, these documents are considered to be incorporated by reference into the
complaint . . . .”); Elf Atochem N. Am, Inc. v. Jaffari, 727 A.2d 286, 287 n.1 (Del. 1999)
(confining review in the context of a Rule 12(b)(1) motion to the allegations of the
complaint and attached exhibits).
1
facts considered in this Memorandum Opinion are either not subject to reasonable
dispute or are subject to judicial notice.2
A. The Merger Agreement
On March 24, 2021, Houston Wire & Cable Company entered into an
Agreement and Plan of Merger (the “Merger Agreement”) with Omni Cable, LLC
and OCDFH Acquisition Sub.3 The Merger Agreement provided that Acquisition
Sub would merge with and into Houston Wire, with Houston Wire surviving as a
wholly owned subsidiary of Omni Cable, in an all-cash transaction valued at $91
million (the “Merger”).4
The Merger Agreement explained that the Merger would “become effective
at such time as [a] Certificate of Merger was filed with the Secretary of State of the
State of Delaware” (the “Effective Time”).5 At the Effective Time, each issued and
2
See, e.g., In re Books–A–Million, Inc. S’holders Litig., 2016 WL 5874974, at *1 (Del. Ch.
Oct. 10, 2016) (explaining that the court may take judicial notice of “facts that are not
subject to reasonable dispute” (citing In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d
162, 170 (Del. 2006))); Omnicare, Inc. v. NCS Healthcare, Inc., 809 A.2d 1163, 1167 n.3
(Del. Ch. 2002) (“The court may take judicial notice of facts publicly available in filings
with the SEC.”).
3
Compl. ¶ 7.
4
Pl.’s Answering Br. Ex. 1 (“Merger Agreement”) § 1.01 (Dkt. 17).
5
Merger Agreement § 1.03.
2
outstanding share of Houston Wire common stock would be cancelled and converted
into the right to receive merger consideration of $5.30 in cash.6
The Merger Agreement stated that “Closing” (defined as “the closing of the
Merger”) would take place “at 9:00 A.M., St. Louis, Missouri time, as soon as
practicable” after the satisfaction of certain conditions, unless the parties agreed in
writing otherwise.7 On May 12, 2021, Houston Wire filed its definitive proxy
statement and announced that a stockholder vote on the Merger would be held on
June 15, 2021 at 10:00 a.m., Central Time.8
B. The Section 220 Demand
On June 7, 2021, plaintiff Todd Swift—then a stockholder of Houston Wire—
sent a letter to Houston Wire demanding certain books and records pursuant to
Section 220 of the Delaware General Corporation Law (the “Demand”).9 The
Demand sought to value the plaintiff’s shares of Houston Wire stock and to
investigate whether Houston Wire’s board of directors had engaged in wrongdoing
with regard to the Merger.10 Houston Wire responded to the Demand on June 14,
6
Compl. ¶ 7; Merger Agreement § 2.01; Houston Wire & Company, Definitive Proxy
Statement (Form 14A) (May 12, 2021) (“Proxy Statement”), at 28.
7
Merger Agreement §§ 1.02, 8.14.
8
Proxy Statement at 7.
9
Compl. ¶ 9; Compl. Ex. 1.
10
Compl. ¶ 11; Compl. Ex. 1 at 2.
3
2021, offering to meet and confer with the plaintiff about the Demand but noting
certain purported deficiencies.11
C. The Stockholder Vote and Certificate of Merger
A special meeting of Houston Wire stockholders was held on June 15, 2021.12
At that meeting, over 60% of Houston Wire’s outstanding shares of common stock
voted in favor of the Merger.13 Houston Wire filed a Certificate of Merger with the
Delaware Secretary of State at 12:19 p.m. EDT that afternoon.14 The Certificate of
Merger stated that the Merger “shall become effective at such time as this Certificate
of Merger is duly filed with the Secretary of State.”15 The Delaware Secretary of
State certified the filing by endorsing the Certificate of Merger with “FILED 12:19
PM 06/15/21.”16
11
Compl. ¶ 14; Compl. Ex. 2 at 2.
12
Houston Wire & Cable Company, Current Report (Form 8-K) (June 21, 2021).
13
Id.
14
Def.’s Mot. to Dismiss Ex. A (“Certificate of Merger”) at 1 (Dkt. 9). The court may take
judicial notice of filings with the Delaware Secretary of State. See Walker v. Cabo Verde
Cap., Inc., 2017 WL 2491516, at *1 (Del. Ch. June 8, 2017) (MASTER’S REPORT) (“The
Court may take judicial notice of documents on file with the Secretary of State at the motion
to dismiss stage.” (citing In re Baxter Int’l, Inc. S'holders Litig., 654 A.2d 1268, 1270 (Del.
Ch. Mar. 7, 1995))), adopted by 2017 WL 2882383 (Del. Ch. June 26, 2017).
15
Certificate of Merger at 2.
16
Id.4
D. This Litigation
On June 15, 2021 at 3:55 p.m., the plaintiff filed its Verified Complaint to
Compel Inspection of Books and Records under Section 220.17 On August 31, 2021,
Houston Wire moved to dismiss the Complaint for lack of standing. Oral argument
on the motion to dismiss was held on September 22, 2021.
II. LEGAL ANALYSIS
A party’s standing can be challenged under Court of Chancery Rule 12(b)(1)
or Rule 12(b)(6). Where “the issue of standing is so closely related to the merits, a
motion to dismiss based on lack of standing is properly considered under Rule
12(b)(6) rather than Rule 12(b)(1).”18 The plaintiff asserts that the defendant’s
motion to dismiss should be reviewed under a Rule 12(b)(6) standard because his
standing is “inextricably tied to the merits of a Section 220 claim.”19
For the reasons discussed below, the plaintiff lacks standing to pursue this
action regardless of which provision of Rule 12 applies. In either case, the
allegations in the Complaint must be taken as true and all reasonable inferences must
17
Dkt. 1.
18
Appriva S’holder Litig. Co. v. ev3, Inc., 937 A.2d 1275, 1285-86 (Del. 2007); see also
Spiro v. Vions Tech. Inc., 2014 WL 1245032, at *8 (Del. Ch. Mar. 24, 2014) (“When the
issue of standing is related to the merits, a motion to dismiss is properly considered under
Rule 12(b)(6) rather than 12(b)(1).” (internal citation omitted)).
19
Corrected Pl.’s Answering Br. 2, 5-8 (Dkt. 18).
5
be drawn in favor of the plaintiff.20 But the court cannot blindly accept the plaintiff’s
assertion that he has standing.21 The provisions of the Merger Agreement coupled
with the unambiguous language of Section 220 demonstrate otherwise, compelling
the dismissal of this action.
A. Section 220 Requires Current Stock Ownership When a
Books and Records Complaint is Filed.
“Stockholders of Delaware corporations enjoy a qualified right to inspect the
corporation’s books and records.”22 This right to inspect corporate records was
recognized at common law because “[a]s a matter of self-protection, the stockholder
was entitled to know how his agents were conducting the affairs of the corporation
20
See Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002) (stating that a court
evaluating a motion to dismiss for failure to state a claim must accept all well-pleaded
allegations as true and “draw all reasonable inferences in favor of the non-moving party”);
de Adler v. Upper N.Y Inv. Co. LLC, 2013 WL 5874645, at *7 (Del. Ch. Oct. 31, 2013) (“If
a party moves to dismiss under Court of Chancery Rule 12(b)(1), the nonmoving party
bears the burden of establishing the Court’s jurisdiction. In this analysis, the Court should
accept the material factual allegations in the complaint as true, and all inferences therefrom
should be construed in the non-moving party’s favor.” (internal citations omitted)).
21
See Price v. E.I. DuPont de Nemours & Co., 26 A.3d 162, 166 (Del. 2011), overruled on
other grounds by Ramsey v. Geo S. Univ. Advanced Dev. Ctr., 189 A.3d 1255 (Del. 2018)
(“We decline, however, to accept conclusory allegations unsupported by specific facts or
to draw unreasonable inferences in favor of the non-moving party.”); Ramunno v. Cawley,
705 A.2d 1029, 1034 (Del. 1998) (stating that a court reviewing a motion to dismiss should
“ignore conclusory allegations that lack specific supporting factual allegations”).
22
Cent. Laborers Pension Fund v. News Corp., 45 A.3d 139, 143 (Del. 2012).
6
of which he or she was a part owner.”23 The qualified inspection right that originated
at common law was codified in 8 Del. C. § 220.24 Section 220(b) provides that:
Any stockholder . . . shall, upon written demand under
oath stating the purpose thereof, have the right . . . to
inspect for any proper purpose . . . the corporation’s stock
ledger, a list of its stockholders, and its other books and
records. . . .25
Section 220(a) defines a “stockholder” as “a holder of record of stock in a stock
corporation, or a person who is the beneficial owner of shares of such stock held
either in a voting trust or by a nominee on behalf of such person.”26
If a corporation or its agent refuses a stockholder’s inspection demand or fails
to respond within five business days, the stockholder is not without a remedy. Under
Section 220(c), “the stockholder may apply to the Court of Chancery for an order to
compel such inspection.”27 That a demand was made by a stockholder and refused
is “necessary, but not sufficient, to proceed” with Section 220 litigation in this
court.28 As Vice Chancellor Glasscock explained in Weingarten v. Monster
23
Shaw v. Agri-Mark, Inc., 663 A.2d 464, 467 (Del. 1995).
24
See Seinfeld v. Verizon Commc’ns, Inc., 909 A.2d 117, 119 (Del. 2006); Saito v.
McKesson HBOC, Inc., 806 A.2d 113, 116 (Del. 2002).
25
8 Del. C. § 220(b).
26
8 Del. C. § 220(a).
27
8 Del. C. § 220(c).
28
Weingarten v. Monster Worldwide, Inc., 2017 WL 752179, at *4 (Del. Ch. Feb. 27,
2017).
7
Worldwide, Inc., Section 220(c) also requires that a plaintiff be a current stockholder
at the time she files her complaint to have standing.29 Section 220(c) mandates that:
Where the stockholder seeks to inspect the corporation’s books and
records, other than its stock ledger or list of stockholders, such
stockholder shall first establish that:
(1) Such stockholder is a stockholder;
(2) Such stockholder has complied with this section respecting
the form and manner of making demand for inspection of
such documents; and
(3) The inspection such stockholder seeks is for a proper
purpose.30
“The language of Section 220(c) is plain and unambiguous.”31 Where there
is no ambiguity, the court must give effect to the expressed intent of the legislators
and “the plain meaning of the statutory language controls.”32 The legislative intent
behind the current ownership requirement of Section 220(c) is not difficult to
29
Id. at *4.
30
8 Del. C. § 220(c) (emphasis added).
31
Weingarten, 2017 WL 752179, at *5.
32
Dir. of Revenue v. CNA Hldgs., Inc., 818 A.2d 953, 957 (Del. 2003); see Hazout v. Tsang
Mun Ting, 134 A.3d 274, 286 (Del. 2016) (“Where the statute is unambiguous, [Delaware
courts] must adhere to the plain meaning of the statutory language.”); Chase Alexa, LLC v.
Kent Cty. Levy Ct., 991 A.2d 1148, 1151 (Del. 2010) (explaining that the purpose of
statutory construction is “to ascertain and give effect to the intent of the legislature, as
expressed in the statute”).
8
glean.33 A plaintiff must have first made a demand at a time when she was a
stockholder.34 And the plaintiff must continue to be a stockholder when she initiates
Section 220 litigation in this court.35
This court has recognized that stockholders can maintain standing if they lose
their stock through a merger while their Section 220 litigation is pending.36 But they
must be stockholders when that litigation is filed.37 Had the legislature intended
otherwise, it could have done so expressly, as in other provisions of the DGCL.38
33
See Great Hill Equity P’rs IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155, 158
(Del. Ch. 2013) (“There is a presumption that the General Assembly carefully chose
particular language when writing a statute . . . .”).
34
8 Del. C. § 220(b).
35
8 Del. C. § 220(c).
36
See Weingarten, 2017 WL 752179, at *5 (discussing Cutlip v. CBA Int’l, Inc. I, 1995
WL 694422 (Del. Ch. Oct. 27, 1995), and Deephaven Risk Arb Trading Ltd. v.
UnitedGlobalCom, Inc., 2005 WL 1713067 (Del. Ch. July 13, 2005)).
37
See Weingarten, 2017 WL 752179, at *5 (describing the legislative intent as requiring
that “only those who are stockholders at the time of filing have standing to invoke this
Court’s assistance under Section 220”); Walker, 2017 WL 2491516, at *3 (dismissing
Section 220 litigation where the plaintiff could not “first establish” that he was a
stockholder when the action was filed); see also Willard v. Harrworth Corp., 267 A.2d
577, 579 (Del. 1970) (affirming the Court of Chancery’s finding that a former stockholder
could not demand books and records of a company that ceased to exist after a merger);
Cutlip, 1995 WL 694422, at *2 (explaining that the plaintiffs had standing to bring a
Section 220 action because they were record owners of the corporation’s stock at the time
the action was filed).
38
See, e.g., 8 Del. C. § 213(a) (providing that stockholders entitled to receive notice of a
meeting are those holding shares as of the record date); 8 Del. C. § 262(a) (limiting
appraisal rights to “[a]ny stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand”).
9
B. The Plaintiff Lost Standing to Pursue This Action at the
Effective Time.
The plaintiff was not a stockholder at the time he filed this action. The Merger
Agreement provides that each share of Houston Wire’s common stock was cancelled
and converted into the right to receive $5.30 in cash at the Effective Time.39 The
plaintiff filed this action several hours after the Effective Time. He therefore cannot
satisfy the current holder requirement of Section 220(c).
The plaintiff contends that the closing of the Merger—rather than the
Effective Time—should be viewed as the relevant event for purposes of standing.
He posits that because the Merger Agreement states that “Closing” would occur “at
9:00 A.M., St. Louis, Missouri time . . . unless another time or date is agreed to in
writing by the parties,” the Merger could not have closed until June 16, 2021 at 9:00
a.m. Central Time absent an agreement.40
In Weingarten, a former stockholder lacked standing to pursue a Section 220
action where the relevant transaction “closed” three weeks before his complaint was
filed.41 The court did not, however, distinguish between the day of closing and the
39
Merger Agreement §§ 1.01, 1.03, 2.01
40
Corrected Pl.’s Answering Br. 13 (quoting Merger Agreement § 1.02).
41
2017 WL 752179, at *6.
10
effective time of the merger. Rather, the court recognized that the relevant inquiry
is whether a plaintiff is a stockholder when she files her complaint.42
Delaware law required that the Merger Agreement state “[t]he manner . . . of
cancelling some or all of such shares.”43 The Merger Agreement set the Effective
Time as the point when stockholders ceased to own stock in Houston Wire.44 Under
Section 251 of the DGCL, the Merger Agreement “bec[a]me effective, in accordance
with [Section 103]”45 when Houston Wire filed the Certificate of Merger with the
Delaware Secretary of State.46
When an instrument (such as a certificate of merger) is filed in accordance
with Section 103, the Delaware Secretary of State certifies it “by endorsing upon the
signed instrument the word ‘Filed’ and the date and time of its filing. This
endorsement is the ‘filing date’ of the instrument and is conclusive of the date and
42
Id. at *5 (“[T]he legislature has made clear that only those who are stockholders at the
time of filing have standing to invoke this Court’s assistance under Section 220.”); see also
Walker, 2017 WL 2491516, at *1 (holding that a stockholder lost standing and noting that
a merger was “effective November 6, 2015, upon the filing of a Certificate of Merger with
the Delaware Secretary of State”).
43
8 Del. C. § 251(b)(5).
44
Merger Agreement § 2.01.
45
8 Del. C. § 251(c).
46
Certificate of Merger at 2. The plaintiff asserts that the court must convert the motion
to dismiss into a motion for summary judgment because the defendant has “introduce[d]
extrinsic evidence” in the form of the Certificate of Merger. See Pl.’s Answering Br. at 8.
As noted above, the court may take judicial notice of filings with the Delaware Secretary
of State. See supra note 2.
11
time of its filing in the absence of actual fraud.”47 An instrument filed in accordance
with Section 103 “shall be effective upon its filing date.”48 The Delaware Secretary
of State endorsed the Houston Wire Certificate of Merger with the word “FILED”
and a time stamp of June 15, 2021 at 12:19 p.m.49
Houston Wire shares continued to trade in the hours following the Effective
Time because Nasdaq did not suspend trading in Houston Wire shares until the close
of business.50 That period of continued trading does not change the reality that,
under the Merger Agreement, the instruments being traded represented “only the
47
8 Del. C. § 103(c)(3). No allegations of fraud were pleaded in this case. The purpose,
timing, or legality of the merger are not issues before me in this Section 220 proceeding.
See Cutlip, 1995 WL 694422, at *2 & n.2, *3; Walker, 2017 WL 2491516, at *2 (“This
Court has declined to enlarge the scope of a Section 220 proceeding to determine the
validity of an underlying merger, assuming instead that the merger was valid.”).
48
8 Del. C. § 103(d); see Brazen v. Bell Atl. Corp., 1997 WL 153810, at *6 n.33 (Del. Ch.
Mar. 19, 1997) (stating that a merger “agreement shall be effective upon its filing date”);
1 Robert S. Saunders et al., Folk on the Delaware General Corporation Law, § 103.05 at
1-69 (7th ed. 2021) (“Unless otherwise established by the Secretary of State upon request,
the ‘filing date’ of the instrument is the date and time of its delivery. Unless otherwise
specified in the instrument, the instrument is effective upon the ‘filing date.’” (citing 8 Del.
C. §§ 103(c)(4), 103(d))).
49
Certificate of Merger at 2; supra note 16.
50
See Houston Wire & Cable Company, Current Report (Form 8-K) (June 15, 2021) Ex.
99.1 (Press Release). When a corporation is acquired in a merger and its securities cease
to exist, securities might not be delisted and trading might not be suspended until the
closing bell on the day the merger is completed. See Nasdaq, Nasdaq Listing Center
Reference Library Identification Number 25, https://listingcenter.nasdaq.com,
https://listingcenter.nasdaq.com/Material_Search.aspx?materials=25&mcd=LQ&criteria=
2&cid=120,1,108,157,14,22,126,142,29,107,34,37,38,45,16,110,52,71,156,69 (last
visited Dec. 3, 2021). Houston Wire’s closing stock price on June 15, 2021 was $5.30—
equal to the Merger Consideration. See Barchart, Houston Wire Cable (HWCC),
https://www.barchart.com/stocks/quotes/HWCC (last visited Dec. 3, 2021).
12
right to receive the Merger Consideration payable in respect thereof.”51 Beyond that,
the shares were “cancelled.”52
Ultimately, Section 220(c) requires that one “first establish” that she “is” a
stockholder when filing a Section 220 complaint.53 Despite alleging otherwise, the
plaintiff simply cannot satisfy that requirement. Section 220(c) does not have an
exception for complaints filed soon after a plaintiff ceases to be a stockholder. A
plaintiff either “is” a stockholder with standing or is not. That may be—as the
plaintiff calls it—a “harsh result.”54 But this court has long recognized that “strict
adherence to the requirements of 8 Del. C. § 220 is mandated.”55 This action
therefore must be dismissed.
III. CONCLUSION
For the reasons explained above, the Complaint is dismissed because the
plaintiff lacks standing to proceed.
51
Merger Agreement §§ 2.01(b), 2.02(b).
52
Id.; see Willard, 267 A.2d at 579 (explaining that where stockholders lost their legal right
except to “exchange their obsolete shares of Harrworth, Inc.” the appellant “ha[d] no
standing as a stockholder of Harrworth, Inc. to demand the inspection”).
53
8 Del. C. § 220(c).
54
Corrected Pl.’s Answering Br. 14.
55
Gay v. Cordon Int’l Corp., 1978 WL 2491, at *1 (Del. Ch. Mar. 31, 1978) (citing Bear,
Stearns & Co. v. Pabst Brewing Co., C.A. No. 5456 (Del. Ch. Nov. 23, 1977)); see also
Cent. Laborers, 45 A.3d at 145 (“Delaware courts require strict adherence to the section
220 inspection demand procedural requirements.”).
13