Saito v. McKesson HBOC, Inc.

Brief Fact Summary.

Saito (Plaintiff) became a shareholder of McKesson after it announced a merger with HBOC to form McKesson HBOC, Inc. (Defendant).  Plaintiff wanted to inspect the books and records of McKesson and McKesson HBOC (Defendant) to investigate McKesson’s apparent failure to learn of accounting irregularities at HBOC until months after the merger was completed.  He also requested documents prepared by third parties for the same purpose, and HBOC documents.  The Delaware Chancery Court denied his requests.

Synopsis of Rule of Law.

(1) A shareholder’s request to inspect a corporation’s books and records is not limited to books and records covering corporate conduct that has occurred after the date of the shareholder’s first acquisition of the corporation’s stock. 

(2) A blanket exclusion of third party documents from a shareholder’s rights to inspect a corporation’s books and records is not proper. 

(3) A shareholder of a parent corporation does not have the right to inspect the books and records of a subsidiary corporation when its existence is separate from the parent corporation.

Facts.

Saito (Plaintiff) became a shareholder of McKesson after it negotiated and publicly announced a merger with HBOC to form McKesson HBOC, Inc. (Defendant).  He wanted to inspect the books and records of McKesson and McKesson HBOC (Defendant) to investigate McKesson’s apparent failure to learn of accounting irregularities at HBOC until months after the merger was completed.  The Delaware Chancery Court denied his request as far as it related to documents prepared before Saito (Plaintiff) became a shareholder on the ground that under 8 Del. C. § 327, stockholders who bring derivative suits must allege that they were shareholders at the time of the complained-of transaction.  Plaintiff also requested documents in Defendant’s possession that the corporation obtained from financial and accounting advisors.  The Chancery Court denied access to these documents on the ground that Plaintiff could not use his inspection rights to bring claims against third parties.  Lastly, Plaintiff requested HBOC documents on the basis that he was a shareholder of HBOC’s parent, McKesson HBOC (Defendant).  The Chancery Court also denied this request on the ground that a stockholder of a parent corporation is not entitled to inspect the books and records of a subsidiary with no showing of fraud or that the subsidiary is an alter ego of the parent, finding no basis to disregard HBOC’s separate identify.  The Delaware Supreme Court granted review.

Issue.

(1) Is a shareholder’s request to inspect a corporation’s books and records limited to books and records covering corporate conduct that has occurred after the date of the shareholder’s first acquisition of the corporation’s stock?  

(2) Is a blanket exclusion of third party documents from a shareholder’s rights to inspect a corporation’s books and records proper? 

(3) Does a shareholder of a parent corporation have the right to inspect the books and records of a subsidiary corporation when its existence is separate from the parent corporation?

Held.

(1) No.  A shareholder’s request to inspect a corporation’s books and records is not limited to books and records covering corporate conduct that has occurred after the date of the shareholder’s first acquisition of the corporation’s stock.  Section 327 governs the qualifications of stockholders to bring derivative actions and does not define the temporal scope of a stockholder’s inspection rights under § 220.  The books and records statute requires only that the stockholder’s purpose be “reasonably related†to his or her interest as a stockholder.  Since stockholders may use information about corporate mismanagement that predates their stock ownership in ways other than to bring a derivative suit, the derivative suit standing statute (§ 327) does not limit the scope of records available to the stockholder under § 220, so long as activities that predated the purchase date are “reasonably related†to the stockholder’s interest as a stockholder.  In this case, Saito (Plaintiff) wanted to investigate McKesson’s failure to learn of HBOC’s accounting irregularities before the merger was completed.  Due diligence documents produced before the merger agreement was signed could be essential to that investigation. 

(2) A blanket exclusion of third party documents from a shareholder’s rights to inspect a corporation’s books and records is not proper.  In general, the source of the documents a corporation is in possession of should not control a stockholder’s right to inspection.  In this case, Saito (Plaintiff) requested documents prepared by financial and accounting advisors in order to investigate possible wrongdoing by McKesson and McKesson HBOC (Defendant)—a proper purpose.  The Court of Chancery decided that pursuing claims against the advisors was not a proper purpose, but also concluded that the documents Plaintiff wanted did not support his proper purpose of investigating possible wrongdoing.  If the Court of Chancery’s ruling intended to exclude all third party documents, such a blanket exclusion would not be proper as McKesson and McKesson HBOC (Defendant) relied on the advisors to evaluate the financial condition of HBOC.

(3) No.  A shareholder of a parent corporation does not have the right to inspect the books and records of a subsidiary corporation when its existence is separate from the parent corporation.  It is a settled principle that stockholders of a parent corporation are not entitled to inspect a subsidiary’s books and records without a showing of fraud or that a subsidiary is the alter ego of the parent.  In this case, however, there was no basis to disregard HBOC’s separate existence, so that Saito (Plaintiff) may not inspect those HBOC books and records that were never provided to McKesson or McKesson HBOC (Defendant).  However, Plaintiff may inspect those relevant HBOC documents that HBOC gave to McKesson before the merger or to McKesson HBOC (Defendant) after the merger.  Such documents would support Plaintiff’s investigation into wrongdoing.  Affirmed in part, reversed in part, and remanded.

Discussion.

The court made note that even if the shareholder’s purpose is only to bring a derivative action, the date of his or her stock purchase should not be used as an automatic cut-off date.  The court reasoned that the potential derivative claim could involve a continuing wrong that both predated and postdated the stockholder’s purchase date, or that the alleged post-purchase wrongs could have began during earlier events.  Therefore, the court implies that in situations such as this, the standing limitations of § 327 would not play a part, as the stockholder would be bringing an action that related to wrongful transactions that occurred after the stockholder’s purchase date, even though the shareholder was using information about actions occurring before the purchase date.