The Delaware Court of Chancery has denied stockholder inspection of three letters on the grounds that the stockholder does not have a proper purpose and that, even if the purpose were proper, the letters are confidential and the harm from disclosure would outweigh the benefits. In Pershing Square, L.P. v. Ceridian Corp., Pershing Square, Ceridian’s largest stockholder, learned that Mr. Krow, the president of one of Ceridian’s two operating units, had sold a significant amount of stock and intended to quit because he disagreed with the business plan of Ceridian’s CEO, Ms. Marinello. Ms. Marinello confirmed those business plans in a meeting with Pershing Square and other significant stockholders. Pershing Square then met with Krow who disclosed the existence of some letters to the board that, inter alia, hinted at mismanagement by the prior CEO and hinted that the board had been lax in its oversight. Pershing Square then announced its intention to run an opposition slate of directors at the Ceridian annual meeting. All these events occurred within two weeks.
A month later, Pershing Square made a books and records demand under DGCL § 220 seeking the letters and a few other items. Ceridian allowed inspection of the other items but denied inspection of the letters. Pershing Square filed suit and a trial ensued.
Chancellor Chandler denied inspection. He held that Pershing Square’s ostensible purposes, to communicate with stockholders for the purpose of soliciting proxies and to investigate the suitability of directors, were not its actual purpose. Pershing Square’s actual purpose was legally to make public the information in the letters, which it could not otherwise publicize without acknowledging that it had obtained that information improperly. Chancellor Chandler also held that the letters were confidential, that their confidentiality had been maintained, and that the harm of disclosure would outweigh the benefits.
Chancellor Chandler is absolutely right here and the case is pedagogically interesting on at least three levels. First, the Chancellor sets out in wonderfully clear and concise language the Delaware rules for books and records disclosure. That is, that the burden is on the stockholder to assert a proper purpose, to prove that it has evidence warranting further investigation, and to prove that the information is necessary and essential to its stated purpose. The corporation may defeat inspection by showing that the stockholder’s ostensible purpose is not a proper purpose or, if it is proper, that it is not the stockholder’s actual, improper, purpose. A stockholder may inspect for a proper purpose even if the stockholder’s additional purposes are improper. Books and records inspection is commonly coupled with a confidentiality order.
Second, it makes a nice contrast with Seinfeld v. Verizon Communications Inc., (Casebook Supplement), which is replacing Compaq Computer Corp. v. Horton, casebook page 567. This case could be inserted at page 571. The two cases taken together would make a nice class discussion of the contours for stockholder inspection.
Finally, and perhaps most importantly, there are distinct fiduciary and professional responsibility aspects to this case. Pershing Square’s counsel and Mr. Krow’s personal counsel attended the meeting between Pershing Square and Mr. Krow. Chancellor Chandler, in his understated way, lays out the problems:
While Krow was a Ceridian fiduciary, but contemplating resignation, he formed an alliance with his employer’s largest stockholder to achieve one common goal—the replacement of the current board with a board that would spin-off Comdata and retain Krow as CEO. To further this goal, Krow participated in two secret meetings with Pershing Square. In the first, he discussed Ceridian’s strategic plans, aligned himself with Pershing Square, and schemed to unseat Ceridian’s current management and board. In the second meeting, held on one day’s notice in an airport, Krow reassured Pershing Square that he was adverse to the current board and at least allied with, if not loyal to, Pershing Square. Krow advised Pershing Square of Ceridian stockholders who were loyal to Krow and would likely support Pershing Square’s opposition slate. He also advised Pershing Square on the suitability of at least one of its nominees. Further, he disclosed confidential information written not only by himself, but also by another Ceridian executive officer.
Notably, Pershing Square and Krow were both represented by counsel, who informed them that Krow might face legal issues if he joined Pershing Square’s slate. Yet, neither party seemed concerned that Ceridian, the company that employed Krow, was not represented at this meeting. Both participants ignored all duties that Krow owed to Ceridian, including Krow’s duty to report to management elected by and responsible to all stockholders. It appears that self-interest, not the best interest of the corporation or its stockholders, drove Krow’s actions, and Pershing Square stood to benefit from Krow’s self-interested actions.
Law professors who teach this case can and should raise questions about Mr. Krow’s behavior under Agency and Corporate law, Pershing Square’s ethics, and counsel for Pershing Square and for Mr. Krow’s professional responsibility.
Francis Pileggi has a very nice discussion of this opinion here.