Thomas & Betts Corp. (Plaintiff) wanted to compel inspection of Leviton Manufacturing Co. Inc.’s (Defendant) corporate books and records with the intention of effectuating its acquisition of Leviton (Defendant).
When a stockholder seeks to compel inspection of the books and records of a corporation, he must show by a preponderance of the evidence that he is motivated by a proper purpose relevant to each requested document’s inspection.
Thomas & Betts (Plaintiff), a New Jersey electronics corporation, showed an interest in a possible union with Leviton Manufacturing (Leviton) (Defendant), a Delaware corporation and manufacturer of electronic components.Â The company’s (Defendant) President and CEO, Harold Leviton, was also a majority stockholder and he controlled a voting trust of 76.45 percent of Defendant’s Class A stock.Â Plaintiff sought to acquire a minority of shares in Leviton (Defendant) in order to attempt a merger between the two companies.Â Plaintiff entered into secret negotiations with Thomas Blumberg and his wife, members of the Leviton family, who owned 29.1 percent of Leviton’s (Defendant) stock.Â Plaintiff purchased the Blumberg’s stock for $50 million, with the potential to receive another $20 million if the sale were completed.Â When Harold Leviton was informed of the sale, he attempted to repurchase the shares sold by Blumberg. Â Thomas & Betts (Plaintiff) executed a formal written demand for inspection of Defendant’s corporate books and records.Â A final offer of $250 million for Defendant’s remaining shares was extended.Â Defendant rejected both the offer to purchase the shares and the demand for inspection.Â Plaintiff initiated suit to compel the inspection.Â The Court of Chancery narrowly limited the scope of Plaintiff’s inspection of Defendant’s records for valuation purposes only.Â Plaintiff appealed.
When a stockholder seeks to compel inspection of the books and records of a corporation, must he prove by a preponderance of the evidence that a proper purpose exists, permitting him to examine each document requested?
(Veasey, C.J.)Â Yes.Â When a stockholder seeks to compel inspection of the books and records of a corporation, he must show by a preponderance of the evidence that he is motivated by a proper purpose relevant to each requested document’s inspection.Â The burden of proof is on the complaining shareholder to show he is motivated by a proper purpose related to his investment in the corporation.Â In satisfying that burden, the shareholder must present credible evidence substantiating his allegations.Â The trial court was incorrect in stating that the shareholder’s burden is â€œgreater-than-normal.â€Â However, the overstated evidentiary burden was not the reason the trial court refused to allow inspection.Â Thomas & Betts (Plaintiff) proffered two purposes for the inspection, the investigation of possible waste and mismanagement of the assets of the corporation, and the valuation of its shares.Â The court reviewing the decision must give great deference to the trial court’s factual determinations when it determines the propriety of the declared purpose by a shareholder.Â In this case, the evidence does not substantiate Plaintiff’s allegations, although investigating possible waste and mismanagement is a proper purpose to compel the inspection of a company’s books and records by a shareholder.Â Here, the court concluded that Plaintiff’s true motivation was to coerce Defendant into a sale of substantially all its assets.Â And so, the purpose was improper as adverse to Defendant’s best interests.Â The trial court, however, permitted Plaintiff’s limited inspection of Defendant’s records for the specific purpose of appraising the value of its shares as a minority shareholder.Â This decision is consistent with the trial court’s broad discretion in prescribing the proper extent of the shareholder’s inspection.Â Affirmed.
The defining of a proper purpose warranting a shareholder’s inspection of the books and records of a corporation is generally to state a purpose related to the individual’s economic interests in the company.Â Therefore, courts generally allow inspection in situations where the shareholder seeks to advance either his own or the corporation’s interests.Â In the same vein, a motion to compel inspection will be denied where the shareholder’s motivations in seeking inspection are for purposes contrary to the interests of the corporation.