In the recent decision of Swift v. Houston Wire & Cable Co., C.A. No. 2021-0525-LWW (Del. Ch. Dec. 3, 2021), the Delaware Court of Chancery considered whether a plaintiff lacked standing to inspect a Delaware corporation’s books and records under 8 Del. C. § 220 when the complaint was filed just hours after a merger went effective that cancelled plaintiff’s shares.
Defendant Houston Wire & Cable Co. (“Houston”) moved to dismiss the complaint in light of the pre-suit merger that caused plaintiff to cease being a stockholder of the corporation. In opposing the motion, Plaintiff argued that the closing of the merger, rather than the “Effective Time” set forth in the merger agreement, should dictate when plaintiff lost his standing to file the Section 220 complaint. The timing was important, because the complaint was filed just hours after the Effective Time set forth in the merger agreement, but, as plaintiff argued, technically before the closing date.
The Court of Chancery found that, under the merger agreement, plaintiff ceased being a stockholder of the corporation upon the Effective Time. The Court considered the time at which the Certificate of Merger was filed with the Delaware Secretary of State. The filing date of that certificate was 12:19 p.m. Although trading occurred later in the afternoon, the Court found that such trading did not change “the reality that, under the Merger Agreement, the instruments being traded represented ‘only the right to receive the Merger Consideration payable in respect thereof.'” Slip op. at 13. Otherwise, the Court found that the shares had been cancelled.
The Court acknowledged that this may be a “harsh result”, as plaintiff called it, but the Court noted that “strict adherence to the requirements of 8 Del. C. § 220 is mandated.” Id. As such, the Court dismissed the Section 220 books and records action.
Key Takeaway: In light of the Swift decision, it is important for any stockholder following the announcement of a merger to file a books and records complaint before the merger goes effective. Otherwise, the stockholder will be without standing to litigate the Section 220 demand.
Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware. You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.