Submitted: December 17, 2014
Jonathan M. Stemerman, Esquire, of ELLIOTT GREENLEAF, Wilmington, Delaware; Attorneys for Plaintiff.
Advanced Battery Technologies, Inc., pro se.
MASTER'S REPORT. (POST-TRIAL)
Abigail M. LeGrow Master in Chancery
This books and records case explores this Court's discretion to prescribe "limitations or conditions" on an inspection and order other "just and proper" relief relating to an inspection demand. In a nutshell, the plaintiff stockholder seeks to inspect the books and records of a publicly traded company that was delisted from the NASDAQ and has not complied with the disclosure obligations of a public company. The stockholder, however, does not want to be precluded from trading in the company's stock, and therefore asks this Court to require the defendant company to publicly disclose the books and records that are the subject of the demand. The company, on the other hand, argues that laws in China – where the company is based – preclude it from fully complying with the inspection demand and that, to the extent the company is required to produce books and records for inspection, the Court should impose a trading restriction on the plaintiff. Ultimately, I conclude that the stockholder is entitled to inspect some of the books and records demanded, that the company has not shown that the inspection is barred by China's laws or regulations, and that – at least under the circumstances of this case – a books and records inspection is not the appropriate mechanism to enforce either party's compliance with or obligations under federal law. I therefore recommend that the Court order the company to produce certain books and records for inspection, subject to a standard confidentiality agreement free from the unusual restrictions either party seeks. This is my post-trial final report in this action.
These are the facts as I find them after trial. Plaintiff Southpaw Credit Opportunity Master Fund, LP ("Southpaw") is a hedge fund specializing in "distressed" securities. Beginning in early March 2014, Southpaw began purchasing stock of Defendant Advanced Battery Technologies, Inc. ("ABAT"). ABAT is a Delaware corporation, but its offices and operations are based exclusively in China. Through an intermediate wholly-owned subsidiary, ABAT owns three operating subsidiaries that are incorporated and based in China: (1) Harbin ZhangQiang Power-Tech Co., Ltd. ("Harbin"), (2) Wuxi Agnell Autocycle Co., Ltd. ("Wuxi"), and (3) Dongguan Qiangqiang Amperex Technologies Co., Ltd. ("Dongguan"). Harbin and Dongguan primarily are focused on the manufacture and sale of certain batteries and battery cells, while Wuxi manufactures and distributes light electric vehicles.
In May 2004, ABAT was listed on the OTC Bulletin Board and its common stock was registered under Section 12(g) of the Securities and Exchange Act of 1934 (the "Exchange Act"). In 2007, ABAT was approved for listing on the American Stock Exchange and in February 2008 it was approved for listing on the NASDAQ. Until 2011, ABAT regularly filed public reports and disclosures in accordance with regulations established by the Securities and Exchange Commission ("SEC"). The Company filed its last quarterly report on August 5, 2011. ABAT was delisted from the NASDAQ in November 2011. The company contends it was forced to delist after short sellers caused its stock price to drop significantly and "a spate of anonymous Internet postings containing allegations of management misconduct led to a NASDAQ investigation and the filing of class and derivative actions against [ABAT] in New York state and federal courts." Since ABAT was delisted, it has traded publicly on the "pink sheets" and has made only a handful of filings with the SEC, including the recent filings that were made after trial and are described below. Since August 2011, ABAT's stockholders have not received any financial information about the company, other than ABAT's 2012 financial results, which were posted on ABAT's website in May 2013. Those financial results were not prepared in accordance with United States Generally Accepted Accounting Principles "(U.S. GAAP") and have not been audited by an external auditor.
Southpaw purchased 1, 676, 319 shares of ABAT stock between March 4, 2014 and March 14, 2014 and candidly concedes that it purchased its shares with full knowledge of ABAT's delisting. Southpaw believed at the time of purchase that ABAT's stock was undervalued, and purchased its shares with the intent of valuing its position by seeking inspection of ABAT's books and records under 8 Del. C. § 220. On March 7, 2014, Southpaw sent ABAT a books and records demand (the "Demand"). The Demand listed two purposes for the inspection: (i) to "[d]etermine the financial risk associated with acquiring a greater position in the company as well as the risks associated with maintaining [Southpaw's] current position" (the "Risk Assessment Purpose"), and (ii) to "[d]etermine actual value of shares currently held (the "Valuation Purpose").  In furtherance of its Risk Assessment Purpose, Southpaw sought 20 categories of documents that included fairly standard valuation information along with information regarding ABAT's indemnification obligations for its board and management, plans for new products, market penetration information, expected profit margins and tax rates, acquisition and stock buyback plans, dividend plans, and any plans to take the company private or to take the company public in China. As to its Valuation Purpose, Southpaw sought nine categories of books and records, eight of which are duplicative of the categories sought in connection with the Risk Assessment Purpose.
On March 14, 2014, ABAT's New York counsel responded to the Demand and indicated that ABAT no longer maintained an office in the United States, but that Southpaw's representative could visit ABAT's office in Harbin, China to view the records requested in the Demand. ABAT's response further stated that, before any such review, Southpaw would be required to confirm that it would not disclose ABAT's information to any other person or trade in ABAT's stock before the information gained from the inspection was disclosed to the public. After some additional non-productive communications between the parties, Southpaw filed its books and records demand in this Court, ABAT retained Delaware counsel, and the parties engaged in discovery.
Part of ABAT's defense of this case involves the location and custody of its books and records. According to ABAT, the financial information Southpaw seeks is generated by ABAT's three operating subsidiaries. Each subsidiary maintains its own books and records and sends periodic – typically quarterly – "work performance reports" to ABAT. ABAT maintains those work performance reports at its offices and uses the reports to create plans and documents for ABAT's internal use. ABAT's witness, Guohua Wan ("Ms. Wan") – an ABAT consultant who previously served as its CFO – testified that those work performance reports contain some, if not all, of the information sought in connection with Demand. Other than the work performance reports, and any books and records ABAT may generate based on those reports, ABAT's operating subsidiaries each retain their own books and records, including financial and accounting records. Aside from Ms. Wan's testimony, ABAT has not distinguished in the record what categories of books and records are in its possession and what categories (if any) solely are in the possession of its subsidiaries.
ABAT views all of its records, both those maintained at its headquarters and those at its subsidiaries' offices, as confidential until they are converted to U.S. GAAP, audited, and provided to the SEC. It does not appear from the record that any of ABAT's financial records have been converted to U.S. GAAP since 2011. In other words, ABAT maintains that all the information requested in the Demand is confidential. Southpaw is willing to inspect ABAT's books and records in whatever form they are maintained, but does not want to receive any information designated as confidential because Southpaw does not want to be restricted from trading in ABAT's stock.
Shortly before the deposition of its witness, ABAT for the first time took the position that certain accounting laws and regulations applicable to companies incorporated in China might preclude ABAT from producing for inspection or copying outside mainland China any accounting records of ABAT's subsidiaries. The evidence ABAT submitted on this issue consists of the testimony of Ms. Wan, who is not a lawyer, a client alert issued by the law firm Jones Day, and uncertified translations of the laws and regulations at issue. ABAT did not raise this defense until a week before trial. Southpaw objected to the late introduction of this issue, while ABAT sought to delay trial in order to explore the defense and submit expert testimony regarding the applicable laws. I allowed ABAT to present the defense, but refused to delay trial or allow the submission of expert reports (which would have had the effect of delaying trial).
At trial, therefore, ABAT introduced uncertified translations of excerpts of the Accounting Law of the People's Republic of China ("PRC") and the "Accounting Archives Management Measures" (the "Management Measures"), which are regulations issued by the Ministry of Finance of the PRC. According to ABAT's translation, Article 7 of the Management Measures provides:
Article 7. Each entities' [sic] accounting records cannot be taken out of its recordkeeping system. If there is any special need, records can be inspected or copied. Such inspection or copying must be approved by the accounting manager of each entity and also must be registered. Personnel participating in the inspection or copying are prohibited from painting on, unpacking, or swapping the records.
Each entity must establish proper procedure to register inspections and copying of accounting records.
Ms. Wan also translated Article 18 of the Management Measures during her deposition.
According to Ms. Wan, Article 18 provides:
The accounting files of companies within the border of the PRC cannot be carried out over the border. Institutions that are overseas as well as companies that have established companies or enterprise overseas (overseas company), their account filings should be managed according to this approach and the relevant regulation of [the PRC].
The parties dispute the applicability of these Management Measures to this proceeding.
Several unusual post-trial developments bear mention. First, after trial the parties supplemented the record with recent public filings and pronouncements by ABAT. On October 20, 2014, ABAT issued a press release and filed a Form 8-K with the SEC in which ABAT announced that it had released its independent accounting firm, EFP Rotenberg, LLP, and retained a new accounting firm, Paritz & Company, P.A., to audit ABAT's financial statements for 2011-2014. ABAT's Chairman and CEO, Zhiguo Fu, explained that the retention and audit was part of ABAT's effort to "become fully compliant with SEC reporting rules." On November 20, 2014, ABAT issued a press release announcing that ABAT and Zhiguo Fu planned to buy back up to 5 million shares of ABAT common stock over the next 12 months, subject to board approval. In the press release, ABAT explained that the company and its chairman believe "ABAT's share price does not fairly reflect our company's intrinsic value."
Second, one of ABAT's stockholders, Joel Caplan, filed a motion to intervene on October 22, 2014, seeking to be added as a party to this case (the "Motion to Intervene"). Both Southpaw and ABAT oppose that motion on the basis that it is procedurally improper and lacks merit. Mr. Caplan argues that he demanded books and records from ABAT in September 2013, but did not pursue litigation to enforce his inspection rights due to the associated legal fees. In his motion, Mr. Caplan argues that he has several concerns about "how various scenarios in this case may play out, " and that "[s]everal possible outcomes of the current [a]ction place [Mr.] Caplan and other shareholders at risk for losing some if not all of their investment without intervention." Specifically, Mr. Caplan muses that ABAT may (1) negotiate a private settlement with Southpaw, (2) refuse to abide by an inspection order issued by this Court, leading to contempt proceedings and ...