By Natalia Morales-Echeverría
A stockholder is entitled to inspect the corporation’s stock ledger, a list of its stockholders, and its other books and records. When seeking inspection of books and records, a stockholder has the burden of proving that her or his purpose is proper or valid. A petitioning stockholder who has complied with the procedural requirements (i.e. sworn request) and who has satisfactorily proved a proper or valid purpose for the requested inspection will have demonstrated her or his right to the inspection. However, that right is restricted to inspection of the books and records that are necessary, essential, and sufficient for the stockholders’ purpose.
Puerto Rico’s corporate law does not specify what is considered a “proper or valid purpose”, and our case law rarely discusses these matters. The last Supreme Court case that interpreted this provision under our law was in 2013. In Domenech v. Integration Corp., 187 DPR 595 (2013), the Court held that a stockholder can present extrinsic evidence to confirm her or his status as stockholder of the corporation, and that a proper or valid purpose for the inspection can be to calculate the bonuses that the corporation granted its officers. Since our corporate law derives from Delaware’s corporate law, we must rely on Delaware’s case law for guidance.
On December 29, 2017, the Delaware Court of Chancery granted a stockholder’s demand to inspect books and records related to the acquisition of West Corporation (“West”) by Apollo Global Management (“Apollo”). In Lavin v. West Corp., C.A. No. 2017-0547-JRS, 2017 WL 6728702 (Del. Ch. Dec. 29, 2017), Plaintiff claimed that the Apollo transaction was preferred over others because West’s directors and officers benefited from a whole-company sale than a segmented sale.
Following the Apollo transaction, Plaintiff requested to inspect West’s books and records to “determine whether wrongdoing and mismanagement had taken place” in connection with the transaction and “to investigate the independence and disinterestedness” of West’s directors. West rejected Plaintiff’s demand for “failure to state a proper purpose and because the demand was overly broad”. West claimed that its board had behaved reasonably in recommending the transaction and, invoking Corwin v. KKR Fin. Holdings, LLC, 125 A.3d 304 (Del. 2015), that any possible breaches of fiduciary duties were cleansed because West’s stockholders approved the acquisition.
The Court rejected West’s argument that Corwin precluded a demand for inspection of corporate books and records. The Court found that plaintiff established a valid primary purpose for seeking inspection of the materials: to investigate whether West’s directors and officers breached their fiduciary duties by approving the sale of West to Apollo when other bids indicated that a sale of West’s various business segments to different purchasers may have yielded greater value for West stockholders. The Court relied on settled Delaware law that a stockholder does not have to prove that wrongdoing or mismanagement actually occurred. However, the Court found Plaintiff’s request to be overly broad (i.e. Plaintiff requested all books and records reflecting communications between West’s board and any potential acquirer), and restricted the request to the relevant time period and to five specific categories of documents that were “necessary to enable him to pursue the proper purposes articulated in his inspection demand”.