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Mudrick Capital Management, L.P. v. Globalstar, Inc.

Court of Chancery of Delaware

July 30, 2018

MUDRICK CAPITAL MANAGEMENT, L.P., Plaintiff,
v.
GLOBALSTAR, INC., Defendant.

          Date Submitted: July 16, 2018

          A. Thompson Bayliss, Michael A. Barlow, and Adam K. Schulman, ABRAMS & BAYLISS LLP, Wilmington, Delaware; Jordan Goldstein, David Elsberg, Joshua Margolin, and Ron Krock, SELENDY & GAY PLLC, New York, New York; Attorneys for Plaintiff.

          Robert S. Saunders, Joseph O. Larkin, Arthur R. Bookout, Matthew P. Majarian, and Stephen J. Della Penna, SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, Wilmington, Delaware; Albert L. Hogan III, SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, Chicago, Illinois; Attorneys for Defendant.

          MEMORANDUM OPINION

          MONTGOMERY-REEVES, VICE CHANCELLOR.

         This case involves a stockholder demand to inspect the books and records of Globalstar, Inc. ("Globalstar" or the "Company"). On April 25, 2018, Globalstar announced its merger with Thermo Acquisitions, Inc. ("Thermo"). In this transaction, Globalstar will acquire assets controlled or owned by the CEO and controlling stockholder of the Company, James Monroe. As a result of the transaction, the controlling stockholder's interest in the surviving entity would increase from 53% to over 80%, while all minority stockholders would be severely diluted.

         Concerned with both the merger process and stock dilution, Mudrick Capital Management, L.P. ("Mudrick Capital"), the Company's largest minority stockholder, sent a demand to inspect the books and records of the Company on May 4, 2018. The demand included seven purposes and fourteen categories of requested documents. Globalstar rejected the demand and produced no documents. This litigation ensued.

         In an effort to resolve this litigation, the parties significantly narrowed the issues. First, Globalstar stipulates that Mudrick Capital's demand letter complies with the form and manner requirements of 8 Del. C. § 220 and that Mudrick Capital has standing to pursue this action. Globalstar also stipulates that six of the seven purposes listed in the demand state a proper purpose to obtain books and records under 8 Del. C. § 220.[1] Second, Mudrick Capital narrowed its document requests. Third, Globalstar produced 188 documents pre-trial and an additional 1, 100 documents post-trial in response to the demand.

         Unfortunately, the parties' efforts to resolve the litigation were unsuccessful, and Mudrick Capital continues to seek (1) emails and other communications related to Mudrick Capital's narrowed document requests from four custodians; (2) documents and communications related to the valuation of one of the merger assets, FiberLight, LLC, and the 2016 failed sale of FiberLight; and (3) draft materials, including (a) drafts of board and special committee minutes and (b) internal drafts of the merger agreement, term sheets, and the letter of intent. Globalstar responds that these documents are not necessary because the documents produced provide Mudrick Capital with sufficient information to address Mudrick Capital's purposes.

         For the reasons stated in this memorandum opinion, I conclude that Mudrick Capital has shown that some, but not all, of the books and records it requests are necessary to address its purposes. I hold that (1) Plaintiff may inspect (a) certain emails and other communications and (b) documents and communications related to the valuation of FiberLight and the 2016 failed sale of FiberLight; (2) Plaintiff may not inspect Draft Materials;[2] and (3) Defendant must produce a privilege log that reflects documents withheld or redacted for any privilege for all productions, including past productions.

         I. BACKGROUND

         The facts in this opinion reflect my findings based on admitted allegations in the pleadings, stipulated facts, trial testimony, and 182 documentary exhibits. I grant the evidence the weight and credibility that I find it deserves.[3]

         A. The Proposed Merger

         1. Events before the merger announcement

         Defendant Globalstar is a Delaware corporation with its principal executive offices in Louisiana.[4] Globalstar provides "mobile satellite voice and data services, "[5] and the Company has rights to use wireless spectrum bandwidth.[6] Wireless spectrum is the bandwidth where wi-fi signal is transmitted.[7] As more technology uses wi-fi, this unique wireless spectrum will become scarcer and, thus, more valuable.[8]

         Globalstar is controlled by non-party and majority stockholder James (Jay) Monroe III.[9] He currently owns approximately 53% of Globalstar's shares through entities he controls.[10] He also serves as the Executive Chairperson of the Board and Chief Executive Officer of Globalstar.[11]

         Plaintiff Mudrick Capital is an SEC-registered investment advisor specializing in distressed companies that it believes are undervalued by the stock market.[12] Mudrick Capital has been a stockholder of Globalstar since 2014 and is currently the largest minority stockholder, beneficially owning approximately 5.6% of Globalstar's outstanding voting capital stock.[13]

         Mudrick Capital's evaluation of Globalstar as an investment is largely based on the potential increase in value of wireless spectrum rights over time.[14] Using the estimated value of Globalstar's assets, including its wireless spectrum rights, Mudrick Capital valued the stock at more than $6.60 per share as of January 2017.[15]And Monroe[16] agreed with this value during the January 2017 investor call.[17]

         Despite the possibly enormous potential of Globalstar's wireless spectrum rights, the Company has had liquidity issues due to a loan that requires large payments every year.[18] To resolve the cash flow problems created by the loan, Globalstar has raised capital through equity offerings in the past.[19] But the 2017 offering was not sufficient to resolve the continuing problem. Globalstar projected that it would have insufficient funds to meet its loan obligations through the end of 2018.[20]

         Aware of these liquidity issues, Mudrick Capital sent a proposal to the Globalstar Board of Directors (the "Board").[21] Mudrick Capital offered to lend Globalstar $150 million in a nonconvertible financing instrument to (1) enable Globalstar to access liquidity to pay amounts due on the loan through at least the end of 2019 and (2) prevent Globalstar from diluting the ownership of minority stockholders through future equity offerings.[22] In addition to sending the offer to the Board members, Mudrick Capital publicly filed it with the SEC in an effort to prevent Globalstar stock value from continuing to decline, as it had done for the last three calendar quarters.[23] Globalstar did not substantively respond to Mudrick Capital's offer.[24]

         2. The merger announcement and structure of the proposed merger

         The Globalstar Board created a special committee of four purportedly independent directors (the "Special Committee") to investigate, negotiate, and approve (or disapprove) a merger transaction with Thermo, an entity controlled by Monroe.[25] The Special Committee and the Board unanimously approved the terms of the Agreement and Plan of Merger dated April 24, 2018 (the "Merger Agreement").[26] On April 25, 2018, Globalstar issued a press release announcing its merger with Thermo (the "Merger"), valued at approximately $1.645 billion.[27] As part of the Merger, Thermo will merge with a wholly owned subsidiary of Globalstar.[28] Globalstar will receive the following assets:

• Nearly 100% of the outstanding membership interests of FiberLight;[29]
• $100 million in cash;[30]
• 15.5 million shares of common stock in CenturyLink, Inc.;[31]
• Certain property in Covington, Louisiana, together with development and construction contracts relating to improvements of the property and sufficient cash to complete improvements on the property;[32] and
• Minority interests in both Pivotal Commware, Inc., and Orion Labs, Inc.[33]

         According to the press release announcing the Merger Agreement, the summed values of the cash ($100 million), the CenturyLink stock ($275 million), and the Louisiana property and the minority interests in Pivotal Commware, Inc., and Orion Labs, Inc. (combined value of $25 million) is $400 million.[34] Simple arithmetic and logic indicate that the value assigned to FiberLight is $1.245 billion.

         Thermo stockholders will receive "Globalstar common stock valued at" $1.645 billion.[35] The number of shares to be issued in the Merger is determined using the volume-weighted average market price of Globalstar common stock for the twenty trading days immediately before the closing.[36] The price of the stock is limited by a collar; the price cannot be less than 80% or more than 120% of the volume-weighted average market price of Globalstar common stock for the twenty trading days immediately before the signing date of the Merger Agreement, or April 24, 2018.[37] Therefore, if there is a notable increase (or decrease) in the value of Globalstar stock during the twenty days before closing, this increase (or decrease) is effectively capped (or floored).

         Jason Mudrick, the President and Chief Investment Officer of Mudrick Capital, testified that the price is limited to a range of $0.52-0.825.[38] Using this range, Globalstar must issue a minimum of approximately 2 billion shares and up to a maximum of approximately 3.2 billion shares.[39] As of February 16, 2018, approximately 1.3 billion shares of Globalstar voting common stock are outstanding.[40] The Merger will more than double-and possibly triple-the number of outstanding shares of Globalstar common stock.

         Under the terms of the Merger Agreement, as the majority stockholder of Thermo, Monroe will receive the majority of the newly issued Globalstar stock.[41] He currently owns, through entities he controls, approximately 53% of Globalstar stock.[42] After the Merger, he will own 83-87% of Globalstar stock.[43] In contrast, the minority stockholders' percentages of ownership will be diluted. For example, Mudrick Capital currently owns approximately 5.6% of Globalstar stock;[44] after the Merger, its ownership will be reduced to approximately 2%.[45] After the Merger closes, Globalstar "expects to initiate" a rights offering of up to $100 million for minority stockholders.[46]

         3. Mudrick Capital's response to the proposed merger

         Mr. Mudrick learned of the Merger on April 24, 2018, in a meeting with Monroe, Kyle Pickens (Vice President of Strategy & Communications), Tim Taylor (Vice President of Finance, Business Operations & Strategy), and Jim Lynch (CEO of FiberLight).[47] Mr. Mudrick immediately had concerns about the interested nature of the Merger for Monroe and also about Globalstar using stock to pay for the transaction at a time when Mr. Mudrick believed the stock was undervalued.[48]

         Mr. Mudrick contacted Moelis & Company ("Moelis"), the investment bank that issued the fairness opinion.[49] He spoke with Lawrence Chu from Moelis, someone whom Mr. Mudrick knows both personally and professionally.[50] Chu indicated that he did not interact directly with Monroe, but instead with the Special Committee.[51] Chu suggested that the members of the Special Committee were not truly independent because Monroe, as the controlling stockholder, handpicks the board members.[52] Chu also informed Mr. Mudrick that he (Chu) had asked the Special Committee to reach out to Mudrick Capital regarding its financing offer and that he was surprised to hear that the Special Committee had not done so.[53]

         A few days later, on April 28, 2018, Mr. Mudrick met with Globalstar representatives, including Monroe.[54] During this meeting, Mr. Mudrick learned that Globalstar had been planning this Merger for "a little over a year."[55]

         Later that same day, Mr. Mudrick met alone with Taylor.[56] He asked Taylor why the Special Committee had not asked for a majority-of-the-minority vote to protect the minority stockholders.[57] Taylor responded that the deal was more certain to get approval without such a provision.[58]

         4. Other responses to the proposed merger

         On April 25, 2018, the day of the Merger announcement, the price of Globalstar stock dropped from $0.70 to $0.65.[59] On the date of the trial, the stock price was $0.47.[60] Currently, Globalstar shares are trading in the range of $0.40 to $0.46 per share. But it is not clear whether the stock price decrease is a response to the Merger or to something else entirely, as the stock price has been declining over the past twelve months.

         On April 26, 2018, the day after the Merger announcement, Cowen, an independent investment research firm, [61] issued a report titled "An Expensive Solution to Globalstar's Liquidity Woe's."[62] Cowen's top-line summary states:

Yesterday morning, Globalstar announced plans to buy assets controlled by its Chairman and CEO, worth about $1 billion on our estimates, for a nominal $1.65 billion worth of shares many believe were already undervalued. The best that can be said is that it's an incredibly expensive fix to the company's liquidity woes; we expect considerable push back from Globalstar's non-affiliated shareholders.[63]

         The report specifically notes that minority stockholders "would see their percentage ownership reduced to little more than a third of today's ownership."[64] The report also assigns a net equity value of $336 million to FiberLight, [65] a stark difference from the $1.245 billion indicated by the press release.[66]

         B. Mudrick Capital's Demand for Books and Records, Globalstar's Response to the Demand, and This Litigation

         On May 4, 2018, Mudrick Capital sent its demand for books and records to Globalstar's Corporate Secretary and its Registered Agent.[67] The demand listed seven purposes for requesting books and records and sought fourteen categories of documents, not including subcategories.[68]

         On May 11, 2018, Globalstar responded to Mudrick Capital's demand, stating that it "fail[ed] to state a proper purpose for inspecting the Company's books and records because it d[id] not demonstrate that Mudrick [Capital] ha[d] a credible basis for suspecting wrongdoing by the directors or officers of Globalstar."[69] It also stated that "the requests in the Demand [were] not 'circumscribed with rifled precision' nor 'essential and sufficient' to the stated purpose of the Demand."[70] But Globalstar offered to meet and confer to discuss the Company's "willingness" to provide Mudrick Capital with documents.[71]

         On May 17, 2018, Mudrick Capital filed its Verified Complaint for Inspection of Books and Records.[72]

         On June 25, 2018, eight days before trial, Globalstar produced 188 documents to Mudrick Capital in response to the Section 220 Demand.[73]

         On June 28, 2018, the parties filed their Joint Pre-Trial Stipulation and Order ("Pre-Trial Order").[74] In this document, Globalstar stipulates that six of the seven purposes in Mudrick Capital's demand are proper.[75] The undisputed purposes relate to investigating possible breaches of fiduciary duty by the Board and Special Committee concerning the Merger, the Merger Agreement, and the related voting agreement; evaluating the fairness of the Merger and the independence of the members of the Special Committee; valuing Mudrick Capital's stock; and communicating with other minority stockholders regarding litigation and other potential corrective measures.[76] Only one purpose remains disputed, but the parties agree that I need not resolve this dispute because none of the demanded documents are exclusive to this purpose.[77]

         In the Pre-Trial Order, Plaintiff narrows its original fourteen requests for books and records by (1) removing its request for FiberLight valuation materials related to past litigation; (2) limiting its request regarding the valuation of Globalstar to materials in three data rooms and documents exchanged with only two specific entities; (3) removing two requests; and (4) amending the definition of "Selected Books and Records" to exclude Globalstar executive officers.[78]

         This Court held a one-day trial on July 3, 2018. Only one witness gave testimony: Mr. Mudrick.

         The parties engaged in further discussions after the trial. Globalstar agreed to produce the following additional documents:

• All draft and final notes, agendas, and written consents;
• All drafts of the Merger Agreement and draft and final term sheets exchanged between Globalstar and the Thermo Companies;
• All director and officer insurance documents concerning director independence (to the extent any exist);
• All non-email material concerning Moelis's selection;
• All draft and final non-email materials given to the Board and to the Special Committee;
• All documents in the three data rooms; and
• All materials given to Globalstar's advisors.[79]

         After the parties' resolution of several issues, Mudrick Capital seeks the following additional documents:

• Emails and other communications transmitted or dated January 1, 2017, to May 4, 2018, and sent to, received by, or in the possession of Globalstar CEO and Board of Directors Chair James Monroe, Globalstar General Counsel L. Barbee Ponder IV, Special Committee Chair J. Patrick McIntyre, or Special Committee member John M.R. Kneuer relating to the Merger, the Merger Agreement, or the voting agreement; the Merger assets or liabilities, including FiberLight and CenturyLink; the establishment, independence, or disinterestedness of the Special Committee; advisors or legal counsel in connection with the Merger or alternatives to the Merger; or any alternatives to the Merger considered by the Board or the Special Committee;
• Documents, including final and draft documents, and communications transmitted or dated January 1, 2016, to May 4, 2018, relating to the valuation of FiberLight or the 2016 failed sale of FiberLight; and
• Draft Materials dated January 1, 2017, to May 4, 2018, including (a) drafts of Board and Special Committee minutes and (b) internal drafts of the Merger Agreement, term sheets, and the letter of intent.[80]

         II. ANALYSIS

         Under Section 220 of Delaware General Corporation Law, stockholders of a Delaware corporation may inspect the books and records of a company for any proper purpose.[81] A proper purpose includes "a purpose reasonably related to such person's interest as a stockholder."[82] "It is well established that a stockholder's desire to investigate wrongdoing or mismanagement is a 'proper purpose.'"[83] The stockholder, however, must present "some evidence that establishe[s] a credible basis from which [this Court] could infer there [are] legitimate issues of possible waste, mismanagement or wrongdoing that warrant[] further investigation."[84]

         Mudrick Capital identifies seven purposes for its demand.[85] Globalstar stipulates, for purposes of this litigation only and without waiver to challenge the allegations in Mudrick Capital's demand and complaint in any future litigation, that it does not contest six of these purposes.[86] Globalstar states that due to its stipulations, "no finding of a credible basis to suspect wrongdoing or mismanagement is required."[87] Thus, the only question for this Court to resolve is the scope of any further inspection.

         The scope of inspection is limited to only those books and records that are "necessary and essential to accomplish the stated, proper purpose."[88] "Documents are 'necessary and essential' pursuant to a Section 220 demand if they address the 'crux of the shareholder's purpose' and if that information 'is unavailable from another source.'"[89] "[T]he burden of proof is always on the party seeking inspection to establish that each category of the books and records requested is essential and sufficient to the stockholder's stated purpose."[90] "[W]here a [Section] 220 claim is based on alleged corporate wrongdoing, and assuming the allegation is meritorious, the stockholder should be given enough information to effectively address the problem, either through derivative litigation or through direct contact with the corporation's directors and/or stockholders."[91]

         Mr. Mudrick gave testimony for several hours, and he testified credibly. As an investment fund manager, his knowledge of Globalstar, a Mudrick Capital investment, is quite extensive. Mr. Mudrick understands the business strategy of Globalstar as it relates to wireless spectrum rights; he participates in investor conference calls; and he meets individually with Globalstar's Board members and management.

         Before testifying, Mr. Mudrick reviewed the 188 documents produced by Globalstar.[92] He testified that Globalstar's production was deficient with respect to Mudrick Capital's demand in multiple ways. The production lacked the following requested documents:

• Emails related to the stated purposes; [93]
• Documents concerning the valuation of FiberLight;[94]
• Draft board minutes; [95]
• Draft presentations; [96] and
• Draft agendas.[97]

         Globalstar's production also failed to include any privilege log to indicate whether documents were withheld or on what basis documents were redacted.[98]

         After Mr. Mudrick testified as to what was missing from the production, he credibly testified as to issues and questions raised by the Merger and by documents included in the production. A selection of those issues and questions are laid out here:

• Monroe owns a majority of Thermo stock;[99]
• Globalstar is paying $1.645 billion for the Merger assets that are controlled by Monroe with no explanation for that valuation; in particular, the Company valued FiberLight at $1.245 billion, although it is likely worth $300-500 million;[100]
• The Special Committee valued FiberLight at $1.245 billion, but all the information concerning FiberLight appears to have come from Monroe;[101]
• Neither the Special Committee nor Moelis appear to have included in their analysis the failed attempt to sell FiberLight in 2016 for less than $500 million;[102]
• There are unresolved accounting and governance concerns surrounding FiberLight, which are cited in the Special Committee minutes as issues that may ...

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