(Reuters) - The Delaware judge who led the Chancery Court’s crackdown on disclosure-only settlements in shareholder suits challenging M&A deals is once again making shareholder firms squirm.
In a short opinion issued Monday, Vice-Chancellor Travis Laster denied the request of a shareholder in the plastics company A. Schulman to inspect corporate books and records related to compensation for Schulman’s CEO. The vice-chancellor said the shareholder’s books-and-records suit, filed after the company refused to turn over materials on a $3.9 million compensation deal for its departing CEO, credibly contended that accelerated vesting of the CEO’s restricted shares may have violated Schulman’s equity compensation plan. Nevertheless, Vice-Chancellor Laster said, the shareholder, Jack Wilkinson, did not have a proper purpose for inspecting Schulman’s books and records because it was his lawyers – and not the shareholder himself – who came up with the idea of challenging the CEO’s stock grant.
The judge specifically called out the shareholder firm Levi & Korsinsky, which has previously represented Schulman plaintiff Wilkinson in at least seven other cases. “The purposes for the inspection belonged to Wilkinson’s counsel, L&K, and not to Wilkinson himself,” Vice-Chancellor Laster wrote. “Wilkinson simply lent his name to a lawyer-driven effort by entrepreneurial plaintiffs’ counsel.”
L&K lawyer Amy Miller did not return my call for comment on the Schulman decision. Nor did Michael Van Gorder of Faruqi & Faruqi, which acted as Delaware counsel to Wilkinson.
Wilkinson authorized Levi & Korsinsky to investigate Schulman, the judge acknowledged. The shareholder was not happy about the company’s financial performance. He was not aware of any wrongdoing or mismanagement, he would later testify, but considered the company’s losses reason enough to demand to inspect Schulman’s books and records.
Wilkinson’s lawyers, according to Vice-Chancellor Laster, developed the theory that Schulman’s board improperly accelerated a stock award for its CEO when he stepped down in 2014. (He has subsequently returned as CEO.) Levi & Korsinsky identified the books and records Wilkinson demanded to see. Wilkinson signed the original demand letter, the judge said, but was not otherwise involved in L&K’s pre-suit attempts to obtain the documents. And after L&K told him Schulman wouldn’t produce the records unless Wilkinson sued, Wilkinson just signed the complaint.
“Wilkinson did not take any steps to confirm the accuracy of the allegations in the complaint; he simply verified the pleading in reliance on counsel,” Vice-Chancellor Laster wrote. “He did not review the company’s answer. When the company served interrogatories, Wilkinson did not participate in drafting the responses. Once again, he simply verified what counsel wrote. The responses stated that the persons most knowledgeable about the purposes in the demand were lawyers at L&K, not Wilkinson.”
When Schulman’s lawyers at Vorys, Sater, Seymour and Pease and Potter Anderson & Corroon deposed Wilkinson in their challenge to the books-and-records suit, Levi & Korsinsky jumped in to object to questions about the purpose behind the shareholder’s inspection demand. According to Vice-Chancellor Laster, the plaintiffs firm argued that Wilkinson should not be asked such questions because “he’s already testified that he didn’t come up with these things.”
Based on the citations in the Schulman opinion, Vice-Chancellor Laster seems to be breaking ground by distinguishing between inspection theories developed by plaintiffs and their lawyers. Chancery Court precedent in 2007’s Pershing Square v. Ceridian Corporation (923 A.2d 810) holds that corporations can fend off shareholder demands to inspect books and records by showing an improper purpose for the demands. But that case didn’t address whether a shareholder’s asserted purpose fails because it was developed by the shareholder’s counsel.
Part of the judge’s skepticism stemmed from Wilkinson’s history with Levi & Korsinsky. Wilkinson testified at his deposition that in the seven (or more) previous cases in which he was represented by L&K, most of them M&A challenges, he “reflexively” agreed to serve as lead plaintiff “because he wanted more money for his shares, regardless of whether the deal price was fair,” Laster wrote. Wilkinson just read and signed the complaints in those old cases, Laster said, without doing anything to verify their allegations. “Wilkinson’s service as a nominal plaintiff for L&K in this action is consistent with his past relationship with the firm,” the judge wrote.
So is this decision a one-time exercise of discretion against a repeat plaintiff and his law firm? Shareholders, after all, rely all the time on outside lawyers to develop theories of corporate misconduct. Is Vice-Chancellor Laster really saying that plaintiffs firms can’t file books-and-records actions unless their clients have independently devised the underlying purpose of the demand?
Perhaps not. The judge specifically said he doesn’t intend to discourage shareholders from seeking advice from outside counsel in books-and-records litigation. This case, he said, falls outside the usual bounds.
“A stockholder seeking an inspection and retaining counsel to carry out the stockholder’s wishes is fundamentally different than having an entrepreneurial law firm initiate the process, draft a demand to investigate different issues than what motivated the stockholder to respond to the law firm’s solicitation and then pursue the inspection and litigate with only minor and non-substantive involvement from the ostensible stockholder principal,” Vice-Chancellor Laster said. “On the record presented in this case, the company proved that Wilkinson’s purported purposes were not his actual purposes. They were his counsel’s purposes.”
Schulman counsel Anthony O’Malley of Vorys and Stephen Norman of Potter Anderson did not respond to my phone and email messages.