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Lavin v. West Corp.

Court of Chancery of Delaware

December 29, 2017

MARK LAVIN, Plaintiff,
v.
WEST CORPORATION, Defendant.

          Submitted October 9, 2017

          Peter B. Andrews, Esquire, Craig J. Springer, Esquire and David M. Sborz, Esquire of Andrews & Springer LLC, Wilmington, Delaware; Randall J. Baron, Esquire and David T. Wissbroecker, Esquire of Robbins Geller Rudman & Dowd LLP, San Diego, California; Christopher H. Lyons, Esquire of Robbins Geller Rudman & Dowd LLP, Nashville, Tennessee; and W. Scott Holleman, Esquire of Johnson Fistel, LLP, New York, New York, Attorneys for Plaintiff.

          Kevin R. Shannon, Esquire, Christopher N. Kelly, Esquire and Daniel M. Rusk, Esquire of Potter Anderson & Corroon LLP, Wilmington, Delaware and Walter C. Carlson, Esquire, Nilofer I. Umar, Esquire, and Elizabeth Y. Austin, Esquire of Sidley Austin LLP, Chicago, Illinois, Attorneys for Defendant.

          OPINION

          SLIGHTS, VICE CHANCELLOR

         In early 2016, West Corporation ("West" or the "Company") began to consider strategic alternatives, including a possible sale of the Company or its business segments. The Company initiated a formal sales process later that year and continued with that process through the spring of 2017. Ultimately, West entered into an Agreement and Plan of Merger (the "Merger Agreement") with affiliates of Apollo Global Management on May 9, 2017, wherein Apollo agreed to purchase West's outstanding stock at $23.50 per share in cash (the "Merger"). On June 27, 2017, the Company distributed its Schedule 14A Proxy Statement (the "Proxy") to its stockholders in which it solicited their votes in favor of the Merger. One month later, the overwhelming majority of West's stockholders voted to approve the Merger and it was consummated shortly thereafter.

         On July 19, 2017, Plaintiff, Mark Lavin, served a demand upon West to inspect its books and records under Section 220 of the Delaware General Corporation Law ("DGCL").[1] In his demand, Lavin stated that his purpose was to "determine whether wrongdoing and mismanagement had taken place" in connection with the Merger and "to investigate the independence and disinterestedness" of the Company's directors.[2] Soon after, West rejected Lavin's demand for failure to state a proper purpose for inspection and because the demand was overly broad.

         Lavin filed his Verified Complaint to Compel Inspection on July 27, 2017 (the day after the stockholders voted to approve the Merger). In its answer to the Complaint, West reiterated its position that inspection was not justified because Lavin could not, as a matter of law, articulate a credible basis of wrongdoing against West's board of directors (the "Board"). In this regard, West maintained that not only did the Board behave reasonably in recommending the Merger as a matter of law, West's disinterested stockholders approved that recommendation in a fully informed, uncoerced vote. According to West, under the so-called Corwin doctrine, [3]the stockholder vote "cleansed" any purported breaches of fiduciary duty and, therefore, Lavin may challenge the Merger only on grounds of waste (which he has not stated as a basis for inspection).[4]

         The parties agreed that the trial of this matter would be limited to a "paper record" without deposition or live testimony. After carefully reviewing the evidence and the arguments of counsel, I conclude in this post-trial opinion that Lavin has demonstrated, by a preponderance of the evidence, a credible basis from which the Court can infer that wrongdoing related to the Merger may have occurred. In so finding, I reject, as a matter of law, West's argument that Corwin will stand as an impediment to an otherwise properly supported demand for inspection under Section 220. Any contrary finding would invite defendants improperly to draw the court into adjudicating merits defenses to potential underlying claims in order to defeat otherwise properly supported Section 220 demands. Equally compelling, the Court should not (and will not here) prematurely adjudicate a Corwin defense when to do so might deprive a putative stockholder plaintiff of the ability to use Section 220 as a means to enhance the quality of his pleading in a circumstance where precise pleading, under our law, is at a premium.

         Judgment is entered for Lavin. West shall produce for inspection the books and records designated herein as essential to Lavin's pursuit of his proper purpose.

         I. FACTUAL BACKGROUND

         The Court held trial on a paper record on October 9, 2017. I have drawn the facts from the trial exhibits and those matters of which the Court may take judicial notice. Unless noted otherwise, the following facts were proven by a preponderance of the evidence.

         A. The Parties

         Plaintiff, Mark Lavin, is a West shareholder who has continuously owned his West common stock since at least June 1, 2017.[5] Defendant, West, is a Delaware corporation with its principal place of business in Omaha, Nebraska.

         B. West's Business

         West is a global provider of communication and network infrastructure services. It provides voice and data services through four "reporting segments": Unified Communications Services ("UC"), Safety Services, Interactive Services and Specialized Agent Services.[6] UC has two separate "operating segments": (1) Unified Communications ("UCaaS") and Telecom; and (2) Conferencing.[7]

         UC is West's largest reporting segment, accounting for approximately 62% of the Company's total revenue and 61% of its total operating income.[8] Of UC's two operating segments, Conferencing is by far the largest, accounting for approximately 50% of West's overall revenue.[9] The Conferencing segment, not surprisingly, concentrates on facilitating audio, webcast and other conferencing capabilities in virtual environments, while the UCaaS segment provides direct IP connectivity and internet platforms.[10]

         West's remaining reporting segments, discussed below, range between approximately 10% and 12% of West's annual revenue.[11] The Safety Services segment includes, inter alia, "next generation 9-1-1, " which routes a 9-1-1 caller's physical location to specific public-safety answering points.[12] The Interactive Services segment includes outbound notification systems (voice, text/SMS and chat), inbound speech solutions, cloud contract center technologies, and web, mobile and professional services.[13] Lastly, the Specialized Agent Services segment includes healthcare advocacy services, cost management services and revenue generation services.[14]

         C. West's Major Shareholders and Board Composition

         Mary West and Gary West (the "Founders") established West in 1986. The Company was publicly traded from 1996 until 2006, when it completed a leveraged recapitalization sponsored by two private equity funds, Thomas H. Lee Partners, L.P. ("TH Lee") and Quadrangle Group LLC ("Quadrangle").[15] Thereafter, in October 2006, TH Lee and Quadrangle purchased the Company's publicly traded securities for cash in a going-private transaction.[16] As of 2013, TH Lee and Quadrangle collectively owned approximately 70% of West's common stock. The Company went public for a second time in March 2013.[17] As a result of this public offering, TH Lee's holdings were diluted to 43.5% and Quadrangle's holdings were diluted to 9.1%.[18]

         At the same time TH Lee and Quadrangle took the Company public in 2013, they entered into a stockholder agreement with the Founders and the Company, whereby the parties agreed that if Quadrangle maintained at least 25% of the shares it held as of the March 2013 IPO date, then it would retain the right to elect one director.[19] For its part, TH Lee bargained for a right to elect up to four directors so long as it held more than 50% of the shares held as of the IPO date.[20] Together, TH Lee and Quadrangle reserved the right to elect half of West's ten-member board.[21]

         Leading up to the Merger, the Board was comprised of Lee Adrean, Thomas B. Barker (West's Chairman and CEO), Donald M. Casey, Jr., Anthony J. DiNovi, Paul R. Garcia, Laura A. Grattan, Jeanette A. Horan, Michael A. Huber, Diane E. Offereins and Gregory T. Sloma.[22] Quadrangle designated Huber, its president and managing principal. TH Lee designated DiNovi and Grattan, its co-president and managing director, respectively. West has represented in its SEC filings that Sloma and Garcia are independent directors, but they were designated to the Board just before the 2013 IPO when TH Lee and Quadrangle controlled the Company.[23]

         According to West, Nasdaq Marketplace Rule 5605(b)(1) required the Board to be comprised of a majority of independent directors in order for West to remain a "non-controlled company, " which ostensibly was its status at the time of the Merger.[24] Although West claims that the majority of the Board was independent, [25]it concedes that TH Lee and Quadrangle could still exercise their contractual rights under the Stockholder Agreement to appoint five of the Company's ten directors throughout the sales process and at the time of the Merger.[26]

         As TH Lee's and Quadrangle's investment in West approached its eight-year mark, they began to liquidate their holdings. Starting in February 2014, the funds initiated a plan to reduce their holdings that eventually included two secondary offerings, one in March 2015 and the other in June 2015.[27] After each offering, West's stock price dropped substantially.[28] Despite selling a large percentage of their holdings, TH Lee and Quadrangle still held enough stock to maintain their full rights to appoint directors under the Shareholder Agreement.[29]

         D. West Considers Strategic Alternatives, Evaluates Bidders and Selects Apollo

         In September 2015, West and TH Lee began to receive unsolicited expressions of interest from third parties regarding possible acquisitions of one or more of the Company's business segments.[30] The following year, in November 2016, the Board announced that it was considering strategic transactions. According to the Proxy, from September 2015 through December 2016, at least thirteen third parties approached West or TH Lee expressing an interest in acquiring either one or more business segments or the whole Company.[31] Indeed, during this time, West received an indication of interest for each segment of the Company.[32]

         West selected Centerview as its financial advisor in April 2016. Centerview's engagement provided for a contingency fee arrangement whereby it would receive a modest flat fee for its work but could earn up to $28 million if the Company consummated the Merger.[33] The Proxy indicates that Centerview contacted fifty-five potential bidders and that West executed confidentiality agreements with thirty different parties.[34]

         By January 2017, the Board instructed Centerview and management to "focus" on a sale of the Company as a whole.[35] After the Board decided to prioritize a whole-company sale, two bidders, "Party H" and "Party L, " made an offer to purchase certain business segments for substantial consideration. Specifically, Party H offered between $2.4 billion and $2.6 billion for all segments excluding the UC segment.[36] Party L made an offer to purchase the Interactive Services and Safety Services segments, along with assets from the Specialized Agent Services segment, for $2.36 billion.[37]

         According to the Proxy, West granted only Apollo, Party H, Party L and one other party access to its data room.[38] Thereafter, the Board began negotiating exclusively with Apollo.[39] On May 9, 2017, West and Apollo signed the Merger Agreement, wherein Apollo agreed to acquire the Company for $23.50 per share, which equates to approximately $2 billion in cash or $5.2 billion in enterprise value taking into account West's long-term debt of approximately $3.2 billion.[40]

         The Merger Agreement contained a no-shop provision with a fiduciary out that at least arguably made it more difficult for a sale of the Company's segments to occur.[41] According to the Merger Agreement, the Board could terminate the deal with Apollo in favor of another transaction only if it received a "Superior Proposal, " which was defined as a proposal to acquire at least 70% of West's assets, revenue or shares.[42] Because West's largest segment, the UC segment, accounted for approximately 62% of West's revenue, the no-shop could have shut out an offer for one or more segments even if the offer was substantially greater than Apollo's.

         West filed the Proxy soliciting votes in favor of the Merger on June 27, 2017.[43]Within a few days, five putative class action complaints were filed in the U.S. District Court for the District of Nebraska, primarily alleging federal securities law violations and claiming that the Proxy contained material omissions.[44] West responded by filing a supplement to the Proxy thereby mooting the disclosure claims in advance of the stockholder vote.[45] On July 26, 2017, approximately 86% of the outstanding shares voted and, of those, 99.8% voted in favor of the Merger.[46]

         In connection with the transaction, Barker (the Chairman and CEO) was set to receive a $19-million "golden parachute" comprised of a $7.5 million cash award and $11.5 million for accelerated vesting of restricted stock, in addition to another $9 million in cash for vested stock options and notional shares.[47] West's non-employee directors were set to receive a $100, 000 cash award in addition to accelerated vesting of restricted stock units worth approximately $100, 000.[48] West's other high-level officers also were to receive "golden parachutes."[49]

         E. Lavin Makes a Section 220 Demand

         On July 19, 2017, Lavin sent his demand to inspect West's books and records under Section 220 of the DGCL. His stated purpose was to "determine whether wrongdoing and mismanagement had taken place" in connection with the Merger and "to investigate the independence and disinterestedness" of the Company's directors.[50] Lavin listed thirteen categories of books and records for inspection. West rejected the demand on July 26, 2017, on the grounds that Lavin had not articulated a credible basis for suspecting wrongdoing and had made an overbroad inspection demand in any event.[51]

         F. Procedural History

         On July 27, 2017, Lavin filed a Verified Complaint to Compel Inspection of Books and Records under Section 220. The parties stipulated to a trial on a paper record, [52] and the Court conducted that trial on October 9, 2017. This is the Court's post-trial decision.

         II. ANALYSIS

         Lavin argues that he has presented sufficient evidence from which the Court can infer that West's directors, for self-interested reasons, favored a less valuable sale of the Company over a more valuable sale of its parts. Specifically, he contends that the evidence supports an inference that (1) the Board knew that the most value-maximizing option was a sale of the Company's business segments; (2) a more valuable sale of the segments was possible given that multiple bidders made substantial offers for each of West's segments; and (3) unlike a sale of the Company, a sale of segments would not provide personal benefits for the directors and senior management, nor would it provide TH Lee and Quadrangle with much needed liquidity.[53] Lavin also argues that Centerview suffered from conflicts of interest that caused it improperly to favor the deal with Apollo. This, he contends, provides at least a credible basis to infer that West's directors and officers may have favored an inadequate bidder, and thus may have breached their Revlon duties, possibly in bad faith.[54]

         Lavin also argues that the Board failed to disclose material information in the Proxy. Specifically, he alleges that the Proxy omits financial growth profiles of West's operating segments, sum-of-the-parts analyses that Centerview may have performed, relevant relationships that certain directors have with TH Lee and Quadrangle and the "seriousness" of the partial-company/segment bidders. Lavin raises these disclosure allegations as an independent basis for inspection and as a response to West's Corwin defense.

         West responds that Lavin has failed to state a credible basis from which the Court can infer that (1) the directors approved the Merger for self-interested reasons or (2) Centerview suffered from disabling conflicts of interest. In framing its argument, West separates Lavin's disclosure allegations from his process allegations. As to the disclosure allegations, West argues that our courts routinely find that the kinds of "tell me more, " "tell me why, " or "tell me more about why" disclosure allegations identified by Lavin fail to state actionable disclosure claims. As to the process allegations, West argues that Corwin applies because a majority of disinterested, informed, uncoerced stockholders approved the Merger. According to West, this should end the inquiry. If the Court looks beyond the Corwin "cleansing, " West contends that the Proxy clearly reveals that the deal process was sound and not tainted by conflicts of interest.

         For reasons discussed below, I am satisfied that Lavin has presented a credible basis from which the Court can infer that West's directors and officers may have breached their fiduciary duties in favoring a sale of the Company as opposed to a sale of its segments. In this regard, I reject West's argument that "Corwin provides the framework" for determining whether Lavin has met his burden to justify inspection.[55] As for the substance of Lavin's claims of wrongdoing, the evidence he presented in support of his process claims clears the very low bar set by the "credible basis" standard of proof.[56] His demand is too broad, however, and must be limited to the books and records that are necessary and proper to assist him in pursuing his investigation.

         A. The Section 220 Standard

         The standard for evaluating a demand for books and records under Section 220 is well settled. A stockholder of a Delaware corporation may inspect the corporation's books and records for any "proper purpose" reasonably related to the stockholder's "interest as a stockholder."[57] The desire to investigate mismanagement or wrongdoing is a proper purpose.[58] To prove that the stated purpose is justified, the stockholder must demonstrate, by a preponderance of the evidence, "a credible basis from which the court can infer that mismanagement, waste or wrongdoing may have occurred."[59] The "credible basis" standard is the lowest burden of proof known in our law; it merely requires that the plaintiff present "some evidence" of wrongdoing.[60] "A plaintiff seeking inspection must also prove that 'each category of books and records requested is essential and sufficient to [its] stated purpose.'"[61]

         B. Corwin Will Not Impede an Otherwise Properly Supported Demand for Inspection

         As stated, West maintains that Lavin must overcome its Corwin defense to prevail on his inspection demand because the Merger was approved by a fully informed, uncoerced vote of West's disinterested stockholders. For the reasons discussed below, I disagree. To explain why Corwin does not apply in the Section 220 context, it is helpful first to revisit Corwin, this Court's faithful application of the doctrine and the pleading burdens it imposes upon the plaintiff who seeks to challenge a stockholder-approved merger or tender offer. With that context in mind, the legal and policy reasons for rejecting West's Corwin argument in this proceeding become clear.[62]

         In Corwin, our Supreme Court clarified the "long-standing" principle that a voluntary, fully informed vote of disinterested stockholders to approve a transaction not involving a controlling stockholder will trigger the business judgment rule standard of review.[63] This now-settled doctrine recognizes a sound policy undergirding our corporate law: it is right to ratchet-down more intrusive judicial review, in order "to avoid the uncertainties and costs of judicial second-guessing, [in those instances where] the disinterested stockholders have had the free and informed chance to decide on the economic merits of a transaction for themselves."[64] Given the overwhelming stockholder vote approving the Merger, and the full embrace Corwin has received by our courts, Lavin is wise to expect that West will raise a Corwin defense should he elect to challenge the transaction in a plenary action.

         Mindful of the challenge(s) to come, Lavin has invoked Section 220 as a means to investigate his potential claims before he launches his formal complaint. Here again, he has proceeded wisely. Following Corwin, commentators and litigants questioned whether the stockholder plaintiff or the fiduciary defendants bore the burden at the pleading stage to demonstrate that the stockholder vote was (or was not) fully informed and uncoerced.[65] Chancellor Bouchard recently provided the definitive answer to the Corwin pleading burden question: the stockholder plaintiff bears the burden of pleading facts that "identify a deficiency in the operative disclosure document."[66] As Chancellor Bouchard explained, allocating the pleading burden to the plaintiffs is "far more sensible" because the contrary rule would put defendants in the "proverbially impossible position of proving a negative."[67] Thus, should the time come when Lavin must answer West's Corwin defense, he will be obliged to do so with well-pled facts in his complaint that support a reasonable inference that the stockholder vote was uninformed or coerced. This is no easy task.[68]

         For over twenty years, Delaware courts have encouraged stockholders to use the "tools at hand" (e.g., Section 220) to gather information before filing complaints that will be subject to heightened pleading standards.[69] Although our courts primarily direct that encouragement (or admonition) to stockholders who intend to file derivative complaints where they will allege demand futility, the direction is equally applicable to stockholders who intend to file class action suits challenging transactions approved by a shareholder vote.[70] Indeed, it would be naïve to believe, in most instances, that the stockholder plaintiff will not face significant challenges to meet her pleading burden in anticipation of a Corwin defense if all she has in hand to prepare her complaint are the public filings of the company whose board of directors she proposes to sue.[71] That is precisely the dynamic that caused our courts to encourage use of the "tools at hand" in the derivative context. And it is precisely the reason this court should encourage stockholders, if feasible, to demand books and records before filing their complaints when they have a credible basis to suspect wrongdoing in connection with a stockholder-approved transaction and good reason to predict that a Corwin defense is forthcoming.

         Moreover, the notion that the court would engage with Corwin, and all that it entails, in a summary Section 220 proceeding has little to commend it as a matter of procedure, at least in the view of this trial judge. Simply stated, Corwin does not fit within the limited scope and purpose of a books and records action in this court.[72]Our law is settled that stockholders seeking books and records under Section 220 for the purpose of investigating mismanagement need not prove that wrongdoing or mismanagement actually occurred.[73] Thus, when a stockholder demands inspection as a means to investigate wrongdoing in contemplation of a class or derivative action, Delaware courts generally do not evaluate the viability of the demand based on the likelihood that the stockholder will succeed in a plenary action.[74] In the rare circumstances where inspection rights have been denied based on an assessment of the merits of the claim the stockholder seeks to investigate, the courts have emphasized either that the claim was simply not "justiciable, "[75] or that the claim on its face was not viable as a matter of law.[76] In either event, it was clear to the court that no amount of additional information would aid the stockholder in pleading or prosecuting the contemplated plenary action, so the inspection demand was denied.[77]

         Although our courts have not addressed whether a company may invoke Corwin as a bar to inspection in a Section 220 proceeding, this court has rejected similar attempts to invoke merits-based defenses that turn on doctrinal burden shifting as a basis to defend otherwise properly supported demands for inspection. For instance, in Khanna v. Covad Communications Group, the defendant argued that the plaintiff could not demonstrate a credible basis to suspect wrongdoing because the challenged transactions "were approved by a majority of directors whose independence and disinterestedness are not fairly questioned by [the plaintiff]."[78] The court disagreed:

The shareholder seeking to investigate corporate wrongdoing, if [the defendant's] analytical approach were adopted, would first be required to survive the functional equivalent of a merits-based dismissal motion in the substantive action. While the analysis to be undertaken in considering those motions is, of course, important, the Section 220 action is not the proper forum for that analysis.[79]

Khanna correctly observed that a summary Section 220 proceeding is hardly the proper setting to consider the nuanced factual and legal questions that are frequently featured when the court is asked to apply Section 144 of the DGCL.[80] The legal and factual questions presented by a properly-invoked Corwin defense are no less challenging.[81]

         In rejecting West's argument that I should take up its Corwin defense now as a basis to deny Lavin's Section 220 demand, I do not mean to diminish the pleading stage business judgment deference that must be afforded fiduciaries whose decisions are approved by properly informed disinterested stockholders freely exercising their right to vote their shares. Nor do I intend to suggest that the fiduciaries Lavin may choose to name in a plenary action will not prevail should they invoke Corwin in a motion to dismiss Lavin's complaint. At this stage, I am simply recognizing that Lavin will bear a burden to be precise in his pleading should he challenge the stockholder vote approving the Merger. Documents he receives under ...


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