Friday, February 15, 2013

Saito v. McKesson HBOC, Inc. case brief

Saito v. McKesson HBOC, Inc. case brief summary 
806 A.2d 113

SYNOPSIS:
-Plaintiff shareholder's derivative action against defendant corporation alleged its directors breached fiduciary duties in connection with a consummated stock-for-stock merger with a target corporation.
-The Delaware Court of Chancery in and for New Castle County decided to limit the shareholder's Del. Code Ann. tit. 8, § 220 demanded investigation of the corporation's books and records.
-The shareholder made an interlocutory appeal.

FACTS:
-The P brought a stockholder’s derivative suit to examine the Defendant's conduct with regard to certain accounting irregularities.
-P wished to investigate wrongdoing that may have occurred prior to his stock ownership.
-P sought to examine documents the corporation had obtained from financial and accounting advisors and documents of its subsidiary in order to understand what the company’s directors knew and why they failed to recognize the accounting irregularities.
-The shareholder's proper purpose for the inspection was to ferret out possible wrongdoing in connection with the merger. 
-The Court of Chancery held (1) that the proper purpose only extended to potential wrongdoing after the date on which the shareholder acquired his stock, (2) that the shareholder did not have a proper purpose to inspect documents relating to potential claims against third party advisors who counseled the boards in connection with the merger, and (3) that the shareholder was not entitled to pre-merger documents of the target because he was not a stockholder of the pre-merger target, and, with respect to post-merger target, he did not establish a basis on which to disregard the separate existence of the wholly-owned subsidiary.

HOLDING:
The supreme court decided:
(1) the § 220 inspection was not controlled by the Del. Code Ann. tit. 8, § 327 stock acquisition date, as prior activities could be inspected if reasonably related to the proper purpose; 
(2) necessary and essential to the proper purpose and not document source controlled the inspection right; and 
(3) relevant documents the target gave to the corporation before or after the merger could be inspected.

RULES:
-A stockholder may access records that predate the purchase of a stockholder’s interest. It should not be used as an automatic cut off date.
-Stockholders of a parent corporation are entitled to inspect a subsidiary’s books and records only after establishing fraud or that the subsidiary is actually the alter-ego of the parent.

CONCLUSION:
-The supreme court reversed the decision and allowed inspection of records reasonably related to the proper purpose (1) before the date the shareholder acquired his shares, (2) irrespective of the source of the records, and (3) given to the corporation by the target before or after the merger, and otherwise affirmed the decision.
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