The rights of stockholders to demand to inspect a corporation's books and records under state corporation laws are a powerful method of ensuring the stockholders' rights and interests are safeguarded. Such inspection rights are not, however, unfettered. Exercising them involves balancing the inspection rights with the rights of corporations “to be free of frivolous or vexatious demands to examine records, and to avoid production of records to individuals pursuing interests other than those relating to stock ownership.” To strike an appropriate balance, stockholders must first comply with certain requirements. Among these are requirements governing the making of an inspection demand on the corporation and the requirement of articulating a proper purpose for the demanded inspection.

A more fundamental requirement—that can be taken for granted—is that the stockholders must have standing as stockholders, both when the inspection demand is made and when they file a lawsuit seeking to enforce their inspection rights. But stockholder standing can be lost in more ways than the voluntary disposition of the stockholders' shares. Courts have recently considered the impact of some of these situations, including corporate life-cycle events like mergers and other federal and state statutes. Practitioners who represent stockholders and those who represent corporations should be mindful of these situations when counseling their clients.

Merger Held to Divest Stockholder of Standing

In Weingarten v. Monster Worldwide, C.A. No. 12931-VCG, (Del. Ch. Feb. 27). the Delaware Court of Chancery considered (as a matter of first impression) the effect of a merger that deprived a stockholder of his stock on the stockholder's subsequent lawsuit seeking to compel the corporation's compliance with Delaware's books and records statute. In August 2016, Monster Worldwide, Inc. (Monster) entered into a merger agreement that contemplated that all of its outstanding stock would be acquired through a cash tender offer pursuant to 8 Del. C. Section 251(h). The tender offer began on Sept. 6, 2016, and expired at midnight on Oct. 28, 2016. On Nov. 1, following the successful consummation of the tender offer, all of Monster's outstanding stock, excluding shares held by the acquirer, Monster, and stockholders who validly exercised their appraisal rights, was cancelled and converted into the right to receive the merger consideration.

Monster stockholder Joe Weingarten submitted an inspection demand on Oct. 19, 2016, several weeks after the launch of the tender offer. Weingarten sought to inspect certain books and records to determine whether to pursue litigation against some of Monster's directors for alleged wrongdoing in connection with the contemplated transaction. Monster rejected the demand, but expressed a willingness to discuss a narrow production. Weingarten attempted to discuss that production with Monster, but reached no agreement and filed no complaint before the transaction closed. Weingarten's stock was among the shares cancelled following the tender offer. On Nov. 22, 2016, Weingarten filed an action in the Court of Chancery to compel the corporation to grant his demanded inspection.