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Rodgers v. Cypress Semiconductor Corp.

Court of Chancery of Delaware

April 17, 2017

T.J. Rodgers
Cypress Semiconductor Corporation

          Submitted: April 12, 2017

          Kevin G. Abrams, Esquire J. Peter Shindel, Jr., Esquire April M. Ferraro, Esquire Abrams & Bayliss LLP

          Edward B. Micheletti, Esquire Cliff C. Gardner, Esquire Lilianna Anh P. Townsend, Esquire R. Garrett Rice, Esquire Skadden, Arps, Slate, Meagher & Flom LLP

         Dear Counsel:

         This letter constitutes the Court's post-trial decision on plaintiff T.J. Rodgers' request to inspect certain books and record of defendant Cypress Semiconductor Corporation ("Cypress") under 8 Del. C. § 220. For the reasons explained below, judgment will be entered in Rodgers' favor and Cypress will be required to produce the documents Rodgers sought in his demand letter dated January 19, 2017 (the "Demand") in the manner set forth below.

         The facts recited in this ruling are my findings based on the testimony and documentary evidence of record from a trial held on April 12, 2017. I accord the evidence the weight and credibility I find it deserves.

         I. Background

         Cypress is a semiconductor design and manufacturing company with its principal place of business in San Jose, California. Rodgers founded Cypress in 1982 and served as its President and Chief Executive Officer for the next 34 years. He beneficially owns approximately 2.35% of Cypress' outstanding common stock.

         In April 2016, Rodgers resigned from his position as Cypress' President and CEO, but he remained on the board until August.

         On August 10, 2016, Cypress' board of directors, including Rodgers, appointed Hassane El-Khoury as the company's new President and CEO, and appointed Ray Bingham, who was then Chairman of the Board, as the Executive Chairman of the Board "to assist Mr. El-Khoury in his transition to the role of President and Chief Executive Officer."[1] The board meeting minutes describe the "Executive Chairman" position as "a newly created position in which Mr. Bingham will function as both an executive officer of the Company and as the Chairman of the Board of Directors."[2] Bingham's compensation as Executive Chairman, which Rodgers believes is excessive, includes almost $900, 000 in bonus and salary per year, and a grant of $4.5 million of restricted stock units. At the end of its August 10 meeting, the board accepted Rodgers' resignation from the board.

         On November 3, 2016, Lattice Semiconductor Corporation ("Lattice") publicly announced that it had signed a definitive merger agreement with an affiliate of Canyon Bridge Capital Partners, Inc. ("Canyon Bridge"), a global private equity buyout firm, pursuant to which Lattice would be acquired by Canyon Bridge. Because Canyon Bridge received its initial funding from investors in China, the transaction is currently awaiting approval by the Committee on Foreign Investment in the United States. The press release announcing the transaction described Bingham as a "Founding Partner" of Canyon Bridge and quoted Bingham's remarks on the merger.[3]

         On December 1, 2016, Rodgers e-mailed Bingham, copying the rest of the board, suggesting that Bingham "lead an effort to eliminate Cypress' Executive Chairman position."[4] In his email, Rodgers laid out the case for why he thought the substantial costs the company was incurring to pay for the Executive Chairman position-equating to about a penny per share of Cypress stock-outweighed any benefits the Company was receiving from Bingham's service in that position. On December 7, 2016, Cypress' Chief Legal Officer responded to Rodgers' email, stating that "the Board has received your email and is meeting to address each of your concerns."[5]

         On December 9, 2016, Rodgers sent a letter to the Cypress board, expressing concern that Canyon Bridge was competing with Cypress for acquisition opportunities in the semiconductor industry and that Bingham had violated Cypress' Code of Business Conduct and Ethics by simultaneously serving as the Executive Chairman of Cypress and a founding partner of Canyon Bridge. The letter also stated that Bingham's involvement in Canyon Bridge "is not just a hypothetical conflict of interest problem; it presents tangible risk to Cypress stockholders."[6]

         On January 19, 2017, Rodgers served on Cypress a demand to inspect certain books and records, including stocklist materials, under 8 Del. C. § 220. The Demand recited seven purposes for the requested inspection, including to:

• Communicate with stockholders of the Company regarding matters of common interest, including but not limited to the composition of the Company's Board of Directors.
• Investigate possible mismanagement and breaches of fiduciary duty by members of the Company's management and the Board.
• Evaluate the suitability of all current members of the Board to continue serving as directors of the Company.
• Evaluate the ability of the Board to consider impartially whether the Company should initiate litigation against Bingham, its Lead Independent Director, Chairman of the Audit Committee, and other current members of the management and/or the board.
• Evaluate possible litigation or other corrective measures.[7]

         The Demand set forth eighteen categories of requested information, and enclosed a form of confidentiality agreement Rodgers was prepared to sign.

         On January 26, 2017, Cypress responded to the Demand, agreeing to provide Rodgers with the requested stocklist materials, subject to the execution of a confidentiality agreement and payment of $2, 500, and directing Rodgers to where he could find Cypress' publicly available bylaws.[8] The response otherwise denied the Demand, stating that "Rodgers is not entitled under Delaware law to inspect the Company's books and records for his remaining stated purposes because he has set forth no credible basis to infer that a non-exculpated breach of fiduciary duty has occurred."[9]

         On January 30, 2017, Rodgers filed his complaint in this action to compel the production of the books and records requested in his Demand.

         On February 3, 2017, Rodgers, through his trust, submitted a letter to Cypress in connection with Cypress' 2017 annual meeting of stockholders, announcing his intention to nominate J. Daniel McCranie and Camillo Martino to the board. On February 17, 2017, Rodgers publicly announced a proxy contest for this purpose.

         II. Analysis

         Section 220(b) of the Delaware General Corporation Law provides that "any stockholder . . . shall, upon written demand under oath stating the purpose thereof, have the right . . . to inspect for any proper purpose . . . (1) the corporation's stock ledger, a list of its stockholders, and its other books and records." Cypress does not dispute that the Demand satisfies the form and manner requirements of Section 220. Rather, the basis of Cypress' defense is that Rodgers has failed to carry his burden to demonstrate a proper purpose.

         A. Rodgers Has Established a Proper Purpose for his Demand

         Under Section 220(b), a proper purpose is one that is "reasonably related to such person's interest as a stockholder."[10] In GM & M Group Inc. v. Carroll, our Supreme Court held that, "once a proper purpose has been established, any secondary purpose or ulterior motive of the stockholder becomes irrelevant."[11]

         A stockholder bears the burden of establishing a proper purpose "to inspect the corporation's books and records, other than its stock ledger or list of stockholders."[12] In Seinfeld v. Verizon Communications, Inc., the Supreme Court explained the nature of this burden when documents are sought to investigate possible mismanagement, as follows:

A stockholder is not required to prove by a preponderance of the evidence that waste and [mis]management are actually occurring. Stockholders need only show, by a preponderance of the evidence, a credible basis from which the Court of Chancery can infer there is possible mismanagement that would warrant further investigation - a showing that may ultimately fall well short of demonstrating that anything wrong occurred. That threshold may be satisfied by a credible showing, through documents, logic, testimony or otherwise, that there are legitimate issues of wrongdoing.
Although the threshold for a stockholder in a section 220 proceeding is not insubstantial, the "credible basis" standard sets the lowest possible burden of proof.[13]

         Rodgers asserts that his "primary purpose for seeking inspection of the Demanded Materials is to investigate wrongdoing by Bingham and the Board. Specifically, [he] seeks to investigate the extent of Bingham's conflict of interest and to identify what steps, if any, the Board has taken to prevent harm to Cypress as a result of that conflict."[14]

         "It is well established that a stockholder's desire to investigate wrongdoing or mismanagement is a 'proper purpose.'"[15] Here, I find that Rodgers has demonstrated, through documents, logic, and testimony, a credible basis to infer potential wrongdoing by Bingham. Specifically, Rodgers has established a credible basis to infer that Bingham may have violated Cypress' Code of Business Conduct and Ethics (the "Code"), which applies to all "employees" of Cypress.

         Section III.C. (i) of the Code states, as follows:

You are prohibited from engaging in any activity that interferes with your performance or responsibilities to the Company or is otherwise in conflict or perceived conflict with the Company. Our policies prohibit any employee from accepting simultaneous employment of any kind without written permission of the Company, and prohibit any employee from accepting simultaneous employment with a Company supplier, customer, developer or competitor. Employees are prohibited from taking part in any activity that enhances or supports a competitor's position. Additionally, you must disclose to the Company any interest that you have that may conflict with the business of the Company.[16]

         Cypress does not dispute that Bingham simultaneously serves as the Executive Chairman of Cypress and a partner at Canyon Bridge, nor does Cypress assert that it was made aware of or approved Bingham's affiliation with Canyon Bridge before November 3, when Lattice announced its proposed acquisition by Canyon Bridge. Thus, a "credible basis" exists to infer that Bingham violated the Code's ...

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