Kt

Facts

P's principal, Marc Abramowitz, met with D's CEO, Alex Karp, and made an initial $100,000 investment in D. P's total investments in D eventually reached $60 million in value. P, D, and other stockholders entered the Investors' Rights Agreement in June 2006; the Amended Investors' Rights Agreement in February 2008; and, without P's involvement, the Amended and Restated Investors' Rights Agreement in July 2015.  The participants in these agreements got a 'right of first offer' as to future stock offerings, which essentially requires D to notify then whenever D seeks to offer its stock and allows these special investors an opportunity to buy stock in the offering. They also got 'Inspection' rights, which include not only the right to inspect books and records but also the right to inspect D properties and discuss d's business with its officers. D and its investors, including P, also entered a First Refusal and Co-Sale Agreement that gives D a right of first refusal when specific investors try to sell their D stock, and certain investors (including P) a co-sale right and right of first refusal second to D's right of first refusal. D has the first option to buy any or all of the block of shares that a selling investor tries to sell, and then qualifying investors got the option to buy their own pro rata portion of the shares within the block after D. The First Refusal Agreement also contains a choice of law clause providing that the Agreement 'shall be interpreted under the laws of the State of California.' In the summer of 2015, Karp accused Abramowitz of stealing D's intellectual property. Abramowitz tried to sell P's stake to a private equity fund, but the sale fell through. Abramowitz testified that the deal fell apart because D had intentionally thwarted the transaction, which is currently the subject of a tortious interference and civil conspiracy lawsuit. On August 16, 2016, P sent D an information request under the Investors' Rights Agreement. D got it and said it would get back to P. P had enough D stock to give it informational rights under the Investors' Rights Agreement as a Major Investor. D did not respond soon. On September 1, 2016, D executed a new set of amendments to the Investors' Rights Agreement and filed a lawsuit against P in the Superior Court of California alleging, among other things, theft of D's trade secrets. The September 2016 Amendments increased the Major Investor threshold from five million to ten million shares, which meant that P (P owned 5,696,977 shares) would no longer qualify for the right of first offer or have inspection rights under the Investors' Rights Agreement. D now had the right to deny an inspection request if P and enough Major Investors consider the request to have been made in bad faith or for an improper purpose. D now had the right to deny access to information it 'reasonably considers to be a trade secret or similar confidential information.' The amendments retroactively altered P's rights under the Investors' Rights Agreement, effectively mooting its August 16 informational request. The court found that D had 'led P to believe that it was considering the information request, and then pulled the rug out from under P(and other similarly situated stockholders) eleven days later by eviscerating its contractual right to seek information.' On September 20, 2016, P sent a written demand requesting to inspect the books and records under 8 Del. C. § 220. The purpose was  'to investigate fraud, mismanagement, abuse, and breach of fiduciary duty committed by [Palantir], its officers, its directors, its agents, and its majority shareholders' relating to the following issues: (1) interference with P's efforts to sell its shares; (2) D's practice of improperly favoring certain stockholders; (3) corporate waste; (4) D's actions that deprived certain investors of the full value of their investments; (5) D's actions that deprived certain investors of their [right of first refusal] to purchase D shares and (6) securities fraud. D rejected the Demand. Negotiations failed. On March 8, 2017, P brought this §220 action. The Court of Chancery found that P had shown a proper purpose of investigating suspected wrongdoing in three areas: (1) 'D's serial failures to hold annual stockholder meetings'; (2) D's amendments of its Investors' Rights Agreement in a way that 'eviscerated P’s contractual information rights after P sought to exercise those rights'; and (3) D's potential violation of two stockholder agreements by failing to give stockholders notice and the opportunity to exercise their rights of first refusal, co-sale rights, and rights of first offer as to certain stock transactions. D was ordered to produce the company's stock ledger, its list of stockholders, information about the company's directors and officers, year-end audited financial statements, books and records relating to annual stockholder meetings, books and records relating to any cofounder's sales of D stock, each notice that D sent to any 'Major Investor' relating to certain offerings or sales of D stock, and certain books and records relating to the Investors' Rights Agreement amendments. It denied P's requests, including its request to inspect emails related to the Investors' Rights Agreement amendments and its request for an exception to a jurisdictional use restriction that the court imposed. As to the email issue, the parties read the Final Order to include a categorical exclusion of emails from the documents that D would be required to produce. The Court denied P's motion to reconsider. The court held that  'access to the books and records of the Corporation (including hardcopy and electronic documents and information)' cannot reasonably be viewed as a targeted request for electronic mail in these circumstances.' The court stated that the Demand had specifically requested emails as to another category of books and records, which the court viewed as showing that 'P was well aware of the distinction' between emails and electronic documents generally. The court also held that 'inspection of electronic mail is not essential to fulfilling P's stated investigative purpose.'

Issues

Rule of Law

Holding and Decision

Legal Analysis

© 2007-2024 ABN Study Partner.