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Wilkinson v. A. Schulman, Inc.

Court of Chancery of Delaware

November 13, 2017

A. SCHULMAN, INC., Defendant.

          Submitted: November 8, 2017

          Michael Van Gorder, FARUQI & FARUQI, LLP, Wilmington, Delaware; Amy Miller, Christopher J. Kupka, LEVI & KORSINSKY, LLP, New York, New York; Attorneys for Plaintiff.

          Stephen C. Norman, Tyler J. Leavengood, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Anthony J. O'Malley, VORYS, SATER, SEYMOUR & PEASE LLP, Cleveland, Ohio; Attorneys for Defendant.


          LASTER, V.C.

         By letter dated August 19, 2016, plaintiff Jack Wilkinson sought to inspect specified categories of books and records of defendant A. Schulman, Inc. (the "Company"). Section 220 of the Delaware General Corporation Law authorizes such a request. It states, in pertinent part:

Any stockholder, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose, and to make copies and extracts from: (1) The corporation's stock ledger, a list of its stockholders, and its other books and records . . . .[1]

         The statute defines a "proper purpose" as "a purpose reasonably related to such person's interest as a stockholder."[2]

         Wilkinson's demand letter identified four purposes for the requested inspection:

(i) To investigate potential wrongdoing, mismanagement, breaches of fiduciary duties and/or waste of corporate assets by the members of A. Schulman's Board of Directors (the "Board"), or others related to the issues discussed below;
(ii) To assess the ability of the Board to consider impartially a demand for action (including a request for permission to file a derivative lawsuit on the Company's behalf) related to the items described in this demand;
(iii) To take appropriate action in the event the members of the Board did not properly discharge their fiduciary duties, including the preparation and filing of a stockholder derivative lawsuit or the sending of a litigation demand letter, if appropriate; and
(iv) To discuss with the Board and/or management proposed reforms to prevent any future wrongdoing or mismanagement related to the issues discussed below.[3]

         The "issues discussed below" involved a decision by the Board to accelerate the vesting of 111, 365 shares of restricted stock for the Company's President and Chief Executive Officer, Joseph M. Gingo, when he retired effective December 31, 2014.

         The demand explained that, under one reasonable reading of Gingo's employment agreement, Gingo only was entitled to pro rata vesting of the shares over time.[4] Based on the amount of time that had elapsed between the grants and his retirement, he could receive a maximum of 111, 365 shares. By accelerating the vesting for all unvested shares, the Board caused an additional 107, 775 shares to vest, worth over $3.9 million. The demand contended credibly that (i) the shares were performance awards under the terms of a stockholder-approved equity compensation plan and (ii) accelerating the vesting of the shares based on the fact of Gingo's retirement violated the requirements for performance awards under the plan.[5]

         The demand articulated harm to the Company as a result of the Board's decision, including the loss of favorable tax treatment under Section 162(m) of the Internal Revenue Code. The demand further observed that, when explaining its rationale for accelerating all of Gingo's shares, the Board referred only to the past services that Gingo had provided to the Company. Because Gingo already had been compensated for those services, and because the Board did not identify any consideration that Gingo provided for the additional shares, the demand posited that there was a credible basis to suspect that the full acceleration could be attacked as corporate waste. The demand also posited that the directors who approved the acceleration could have been serving Gingo's interest rather than the Company's, giving rise to a credible basis to suspect a breach of the duty of loyalty.

         By letter dated September 1, 2016, the Company rejected the demand in its entirety. By letter dated September 23, Wilkinson's primary counsel, Levi & Korsinksy LLP ("L&K"), followed up on the demand. By letter dated October 12, the Company again rejected the demand in its entirety.

         Wilkinson filed suit on February 22, 2017. The parties engaged in discovery, and Wilkinson was deposed. A trial ...

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