Pietrasik v. Kraus Hamdani Aerospace: Despite Plaintiff’s “Rancor,” Delaware Court Grants 220 Demand

Hogan Lovells

Hogan Lovells

After a de novo review of the record following a Magistrate in Chancery’s final report, Vice Chancellor Fioravanti of the Delaware Court of Chancery declined to accept the Magistrate’s recommendation to deny a plaintiff-stockholder’s books and records requests for documents beyond those the company already had provided. The magistrate found that the plaintiff’s “primary purpose” was to bring a personal lawsuit against the co-founder of the company, which is not a proper purpose under Section 220. Upon review, Vice Chancellor Fioravanti disagreed and instead concluded that the plaintiff also had legitimate objectives supporting the inspection requests sufficient to be a “proper purpose” under Section 220 as well as a credible basis to suspect wrongdoing.

The plaintiff (Plaintiff) is a stockholder and former employee of defendant Kraus Hamdani Aerospace, Inc. (the Company). Plaintiff served a demand to inspect eleven categories of company books and records pursuant to 8 Del. C. § 220. The Company provided some but not all of the requested documents. A Magistrate in Chancery issued a final report recommending denial of inspection beyond the books and records the company had already provided (the Final Report). Supported by evidence of the Plaintiff’s personal animus toward the company’s co-founder, Fatema Hamdani (Hamdani), the Magistrate concluded that Plaintiff was pursuing the requests with the improper purpose of preparing for a personal lawsuit against the co-founder. Plaintiff challenged this ruling by filing a Notice of Exceptions (the Exceptions) from the Final Report.

After de novo review of the record following the Final Report, Vice Chancellor Fioravanti granted Plaintiff’s Exceptions and declined to accept the Final Report, finding that Plaintiff’s inspection requests targeted information that could prove that Hamdani had mismanaged the company by exposing it to liability as a government contractor and by misappropriating corporate assets. 

The court began its analysis by emphasizing that a stockholder will satisfy its initial burden to obtain inspection of books and records to investigate wrongdoing or mismanagement if the stockholder can establish, by a preponderance of the evidence, any “credible basis” for inferring possible mismanagement warranting further investigation. In this case, the Company did “not seriously challenge” the evidentiary record supporting such an inference. As a result, the burden shifted to the Company to make a “fact intensive and difficult” showing that the “primary purpose” of the inspection request was improper.

The Company’s argument that Plaintiff’s purpose was improper relied on evidence, including testimony by Plaintiff, indicating Plaintiff’s “rancor” for Hamdani and Plaintiff’s intention to file a personal lawsuit against Hamdani. But the Vice Chancellor found potential personal animus by the Plaintiff “does not undermine his primary purpose of investigating mismanagement and the perceived harm that Hamdani has caused the Company.”

After granting Plaintiff’s Exceptions and declining to adopt the Final Report, the court remanded the matter to the Magistrate to consider the scope of the inspection and application of attorneys’ fees, which were not part of the Magistrate’s Final Report.

As this case confirms, stockholders demanding inspection have a low burden of proof in showing a “proper purpose” for their books and records requests, and can demonstrate a proper purpose even in instances where there is evidence of possible ulterior motives or personal interests that go beyond the bringing of derivative claims.

[View source.]

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