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Kosinski v. GGP Inc.

Court of Chancery of Delaware

August 28, 2019

RANDY KOSINSKI, Plaintiff,
v.
GGP INC., Defendant.

          Submitted: June 5, 2019

          Seth D. Rigrodsky, Brian D. Long, Gina M. Serra, RIGRODSKY & LONG, P.A., Wilmington, Delaware; Carl L. Stine, Adam J. Blander, WOLF POPPER LLP, New York, New York; Counsel for Plaintiff Randy Kosinski.

          Kevin G. Abrams, John M. Seaman, Matthew L. Miller, ABRAMS & BAYLISS LLP, Wilmington, Delaware; John A. Neuwirth, Evert J. Christensen, Jr., Seth Goodchild, Matthew S. Connors, WEIL, GOTSHAL & MANGES LLP; Counsel for Defendant GGP Inc.

          MEMORANDUM OPINION

          McCORMICK, V.C.

         In 2018, GGP Inc. merged with its thirty-four percent stockholder. The plaintiff in this action owned GGP stock and sought books and records under Section 220 of the Delaware General Corporation Law to investigate possible wrongdoing in connection with the merger. After GGP rejected the inspection demand, the plaintiff commenced this action to enforce his inspection rights. In this action, GGP argues that the plaintiff is not entitled to inspect books and records because his stated purposes for inspection are not his own, he lacks a credible basis for investigating possible wrongdoing, and he otherwise fails to provide a proper purpose for requesting books and records. This post-trial decision finds in the plaintiff's favor on each of these issues. This decision does not address the scope of inspection or whether the documents sought should be subject to confidentiality restrictions-the parties have twenty days to confer concerning these issues.

         I. FACTUAL BACKGROUND

         These are the Court's findings of fact based on the paper record presented at trial. That record comprises sixty-one joint trial exhibits, [1] stipulations of fact in the pre-trial order, and the deposition testimony of the plaintiff.[2]

         A. The Merger

         GGP was a publicly traded real estate company incorporated in Delaware and headquartered in Chicago, Illinois.[3] In 2010, GGP emerged from bankruptcy and entered into a series of investment agreements, including one with Brookfield Property Partners L.P. (together with its subsidiaries and affiliates, "Brookfield"), a commercial real estate company.[4] Brookfield owned about thirty-four percent of the outstanding shares of GGP's common stock.[5]

         On November 11, 2017, Brookfield submitted an offer to acquire all of the outstanding shares of GGP common stock it did not already own.[6] Brookfield offered to pay per share either 0.9656 units of Brookfield or $23.00, subject to proration.[7]

         The next day, the GGP board formed a special committee (the "Special Committee") to negotiate the merger.[8] At the time of the merger, the GGP board comprised Chief Executive Officer Sandeep Mathrani, Richard B. Clark, Mary Lou Fiala, J. Bruce Flatt, Janice R. Fukakusa, John K. Haley, Daniel B. Hurwitz, Brian W. Kingston, and Christina M. Lofgren.[9] Of the nine directors, three-Clark, Flatt, and Kingston-were affiliated with Brookfield and appointed by Brookfield to the GGP board pursuant to the Brookfield-GGP investment agreements.[10] The Special Committee comprised Fiala, Fukakusa, Haley, Hurwitz, and Lofgren.[11] Hurwitz was made the Special Committee chair.[12]

         The Special Committee negotiated with Brookfield throughout late 2017 and into early 2018, and entered into a merger agreement on March 26, 2018 (the "Merger Agreement").[13] Pursuant to the Merger Agreement, GGP stockholders were entitled to total per share consideration of $23.50 in cash, one Brookfield unit, or one share of a newly created U.S. Real Estate Investment Trust ("REIT"), subject to proration.[14] The Special Committee's negotiation efforts resulted in a 50 cent per share increase.[15] Those efforts also increased the exchange ratio from 0.9656 to 1.0000.[16]

         The Special Committee unanimously recommended the transaction.[17] On July 26, 2018, GGP stockholders voted to approve the merger.[18] The merger closed on August 28, 2018.[19]

         B. The Demand for Inspection

         Plaintiff Randy Kosinski ("Plaintiff") is the quintessential main street investor. He lives in the suburbs of Buffalo, New York.[20] In his early twenties, he built a hockey rink, which he ran for around thirty-four years.[21] In retirement, Plaintiff has grown more interested in his stock portfolio.[22] In his words: "I'm not a rich guy. I make a living. I've worked for my living. Again, I've invested for my living, I babysit my living, I make sure what my stocks are doing, I do my homework."[23]

         Plaintiff did his homework on GGP. Since 2009, Plaintiff has accumulated 12, 000 shares of GGP.[24] Plaintiff explained that he regularly reviewed GGP statements, [25] read analyst reports, [26] and followed the retail sector.[27] When the merger was announced, Plaintiff had an informed view on the market and believed that "[GGP] was making all the right moves" and that GGP's "value was much greater" than the deal price.[28]

         Plaintiff was disappointed with the merger price.[29] His kneejerk reaction was to pursue a lawsuit challenging the merger.[30] The day after the merger was announced, Plaintiff responded to an advertisement from a law firm about a potential lawsuit challenging the merger.[31] The next day, Plaintiff called GGP's Investor Relations department and left the following voicemail:

Kevin, I'm a shareholder. I'm wondering if you're the investor relation guy or not, but I just needed to voice my opinion. I've been a long-term shareholder and this is a disgusting back-door deal that you guys just put together.
I mean, this is full of fraud and I'm very disappointed. Hopefully, we'll win our case. Thank you.[32]

         Plaintiff subsequently learned of his information rights as a GGP stockholder.[33] He came to believe that obtaining information was the logical first step. As he said, "I felt that [counsel] had the right approach about obtaining books and records and not to put the cart before the horse . . . ."[34]

         Around July 9, 2018, through counsel, Plaintiff demanded inspection of GGP's books and records pursuant to Section 220.[35] Plaintiff testified that he relied on counsel to prepare the demand letter, but that he reviewed it before it was sent and concluded it accurately reflected his purposes.[36] During his deposition, Plaintiff explained each purpose in detail.[37]

         C. This Litigation

         GGP rejected Plaintiff's demand on July 17, 2018.[38] On July 25, 2018, Plaintiff filed his Verified Complaint Pursuant to 8 Del. C. § 220 to Compel Inspection of Books and Records. GGP answered the complaint and the parties stipulated to a trial date. GGP deposed Plaintiff on March 20, 2019, and his deposition testimony was admitted as evidence at trial.[39] The parties completed briefing on May 14, 2019, [40] and the Court held trial on June 5, 2019.

         Other stockholders filed plenary class action litigation in this Court[41] and in federal court.[42] Plaintiff moved to intervene in the action pending before this Court on March 6, 2019.[43] Counsel to the class stipulated to permit intervention for limited purposes and to stay the plenary litigation pending resolution of the instant action.[44]

         II. LEGAL ANALYSIS

         Under Section 220, a stockholder is entitled to inspect a company's books and records if he demonstrates by a preponderance of the evidence that he: "(1) is a stockholder of the company, (2) has made a written demand on the company, and (3) has a proper purpose for making the demand."[45] If a stockholder meets these three requirements, he must then establish "that each category of the books and records requested is essential and sufficient to [his] stated purpose."[46]

         Defendant challenges Plaintiff's Section 220 demand on three grounds. First, Defendant argues that Plaintiff's purposes in making the demand were his lawyers' rather than his own. Second, Defendant argues that Plaintiff's stated purposes are improper. Third, Defendant argues that the categories of documents Plaintiff seeks are not necessary and essential to his enumerated purposes.

         A. Plaintiff's Purposes Are His Own.

         Defendant argues that Plaintiff's demand and this litigation are lawyer-driven and reflect the intentions of Plaintiff's counsel rather than Plaintiff himself.[47]

         It is true that "[a] corporate defendant may resist demand where it shows that the stockholder's stated proper purpose is not the actual purpose for the demand."[48]However, "[s]uch a showing is fact intensive and difficult to establish."[49] In Wilkinson v. A. Schulman, Inc., this Court declined to enforce inspection rights because "the purposes for the inspection belonged to [the plaintiff's] counsel . . . and not to [the plaintiff] himself."[50] Several unusual facts led the Court to conclude that the plaintiff in Wilkinson merely "lent his name" to counsel for purposes of counsel's own Section 220 investigation.[51] In that case, the plaintiff admitted in his deposition testimony that the purposes in his demand letter were not his own and that his counsel came up with each of them.[52] Discovery revealed that the issue that concerned the plaintiff (the company's negative financial results) "differed substantially" from what his counsel ultimately chose to investigate (an executive compensation issue).[53] Also, the plaintiff lacked any understanding of his demand letter or involvement in the action to enforce his inspection rights.[54]

         In this case, Defendant emphasizes the fact that Plaintiff's original intention in retaining counsel was to commence litigation challenging the merger, rather than to seek to inspect books and records.[55] Defendant contends that Plaintiff's counsel, having failed to file suit before three other GGP stockholders did in April and May 2018, "lost the race to the courthouse" and decided to go the Section 220 route instead.[56] This, Defendant argues, qualifies as the sort of "lawyer-driven litigation" that Wilkinson wards against.[57] Defendant also points to a text-message in which Plaintiff references his books and records demand and states that he had made a lot of money on his GGP stock, "so whatever happens . . . happens."[58] In Defendant's view, this message shows that Plaintiff is taking a backseat to this litigation and is merely "lending his name" to the complaint, [59] as the plaintiff did in Wilkinson.

         Defendant's efforts to analogize this case to the unusual facts of Wilkinson are deeply misguided. In relying on Wilkinson, Defendant ignores the extensive evidence of record, which reflects that Plaintiff's stated purposes were his own and that Plaintiff has been meaningfully involved in seeking books and records.

         Plaintiff's deposition testimony revealed him to be sincere in his pursuit of books and records, unlike the plaintiff in Wilkinson. In his deposition, Plaintiff admitted that his counsel helped articulate his demand purposes, [60] but demonstrated a clear understanding of the facts and goals relevant to each purpose. For example, when asked which of the categories of requested documents would help him achieve the purpose of valuing his shares, Plaintiff explained that the requested documents would help determine how the Special Committee "came up with their share price . . . versus what the fair market value maybe could have been."[61] He further stated that he sought information about "how [the Special Committee] arrived at this share price or why the deal was necessary or why the deal was even entertained in the first place."[62]

         Also in his deposition, Plaintiff emphasized the importance of investigating the disinterestedness of the Special Committee, stating, "this should have been a totally independent group with no ties whatsoever. And I think . . . maybe the special committee was [rushing] to get this to go through."[63] He specifically identified that there was at least one Special Committee member who had ties to one of the merger's financiers, Royal Bank of Canada ("RBC"), and that another Special Committee member held overlapping employment terms with Brookfield executives at Ernst & Young.[64] Further, Plaintiff was able to define "fiduciary duty" with relative accuracy, [65] and intentionally left the legal question of whether breach may have occurred to his attorneys.[66] Plaintiff's deposition revealed him to be motivated to inspect GGP's documents, apprised of the contents of the demand and the circumstances of the merger, and chalk-full of common sense. The fact that Plaintiff sought and accepted the advice of counsel is to his credit, not his detriment.[67]

         Further, Plaintiff has been meaningfully involved the demand process and this litigation, unlike the plaintiff in Wilkinson.[68] The text-message to which Defendant points is not persuasive evidence that Plaintiff "merely lent his name to the effort."[69]In his deposition testimony, Plaintiff explained: "Well, it's unchartered waters to me, so whatever is going to happen is going to happen. I can't control what I can't control."[70] The Court does not interpret Plaintiff's text-message as an indication that he took a backseat in this litigation, but rather as an acknowledgement of uncertainty inherent in any adversarial process.

         B. Plaintiff's Purposes Are Proper.

         "The paramount factor in determining whether a stockholder is entitled to inspection of corporate books and records is the propriety of the stockholder's purpose in seeking such inspection."[71] A purpose is "proper" where it reasonably relates to the stockholder's interest as a stockholder.[72] "In a section 220 action, a stockholder has the burden of proof to demonstrate a proper purpose by a preponderance of the evidence."[73]

         Plaintiff articulated three purposes in his Section 220 demand: (1) "to investigate potential breaches of fiduciary duty in connection with the merger," (2) "to investigate director disinterestedness related to the merger," and (3) "to value [Plaintiff's] GGP shares."[74]

         1. Investigating Possible Wrongdoing

         To inspect books and records for the purpose of investigating waste, mismanagement, or wrongdoing, a stockholder must "present some evidence that establishe[s] a credible basis from which the Court of Chancery could infer there were legitimate issues of possible waste, mismanagement or wrongdoing that warrant[s] further investigation."[75] The "credible basis" standard is "the lowest possible burden of proof."[76] It requires that the plaintiff demonstrate only "some evidence" of possible mismanagement or wrongdoing to warrant further investigation.[77] "A stockholder is 'not required to prove by a preponderance of the evidence that waste and [mis]management are actually occurring.'"[78] The "threshold may be satisfied by a credible showing, through documents, logic, testimony or otherwise, that there are legitimate issues of wrongdoing."[79]

         To meet the credible basis requirement, Plaintiff argues that Brookfield was GGP's de facto controller at the time of the merger, and that the procedural protections sufficient to trigger the business judgment standard of review under Kahn v. M & F Worldwide Corp.[80] were not implemented.

         Defendant first responds by denying that Brookfield was a de facto controller, but Defendant's argument is unpersuasive. Prior to the merger, Brookfield owned approximately thirty-four percent of GGP's common stock.[81] Brookfield's stock ownership gave it the power to appoint three directors to GGP's nine-member board.[82] In its 2017 Form 10-K, GGP indicated that Brookfield owned or managed "a significant portion of the shares of [GGP] common stock" and expressed that this "concentration of ownership . . . may make some transactions more difficult or impossible without their support, or more likely with their support."[83] The 10-K further states that Brookfield would be able to exert "significant influence" over GGP in making "any determinations with respect to mergers."[84] In the Section 220 context, these facts are enough to demonstrate the possibility that Brookfield was a de facto controller at the time of the merger.[85]

         Defendant next contends that whether Brookfield and GGP implemented the procedural protections of MFW speaks solely to whether the entire fairness standard applies in plenary litigation and not to whether the Special Committee committed possible wrongdoing to support a Section 220 inspection. As Defendant correctly observes, it is "never a requirement" that a merger transaction be subject to the protections of MFW, [86] and the absence of those protections does not mandate a finding of wrongdoing. Rather, satisfying the MFW requirements merely subjects the transaction to a more deferential standard of review.

         Yet, the reason why the presence of certain procedural protections results in a deferential standard under MFW is that, in theory, those protections "operate[] to replicate an arm's length merger."[87] In MFW, the Delaware Supreme Court described the relevant procedural protections as "optimal[]" to protect minority stockholders from the "undermining influence" of a controller.[88] It logically follows that where the procedural protections that trigger deferential review of a controller transaction under MFW are absent, it is possible that the transaction was not at arm's length, less than optimal, and potentially tainted by the undermining influence of a controller. There is no reason why these possibilities cannot contribute to a credible basis.[89]

         In this case, the three grounds Plaintiff identifies for calling into question compliance with MFW establish a credible basis to investigate possible wrongdoing.

         First, Plaintiff points to facts to show that members of the Special Committee were interested or lacked independence.[90] Fukakusa served as Chief Administrative Officer and Chief Financial Officer of RBC for some time, until her retirement in 2017.[91] In 2016 alone, her direct compensation totaled almost $4.65 million- almost 60 percent of that amount came in the form of performance deferred share units ("PDSUs") and stock options, as part of RBC's mid and long-term incentive plan.[92] RBC disclosed that, "[i]n light of her decision to retire early in 2017, Ms. Fukakusa elected to receive her equity award in the form of PDSUs."[93] After she retired from her position at RBC, Ms. Fukakusa was appointed to the Special Committee, [94] and the merger was a transaction from which RBC, as one of its financiers, stood to receive a substantial benefit.[95] Haley's employment at Ernst & Young, which overlapped with that of two Brookfield executives, is evidence of another possible conflict.[96]

         Second, Plaintiff alleges that Brookfield's initial offer was not conditioned on the approval of a special committee.[97] MFW requires a "controller to self-disable before the start of substantive economic negotiations" to prevent the controller from using procedural protections as bargaining points in price negotiations.[98] Where a controller fails to condition the transaction on procedural protections, there is a risk that achieving those protections negatively affected price negotiations.

         Third, Plaintiff points to facts suggesting that the Special Committee failed to obtain a fair price in negotiations with Brookfield. To support this contention, Plaintiff points to the following financial advisor presentations and analyst reports:

• In late November and early December 2017 presentations, the Special Committee's financial advisor, Goldman Sachs ("Goldman"), calculated GGP's NAV as ranging from $26.65 to $29.93 per share, [99]and Brookfield's initial offer as having an actual value of only $22.06.[100] Goldman's presentations also provided a selection of market commentary from equity analysts claiming the offer price was too low.[101]
• On the same date the Merger Agreement was announced, James Sullivan, an equity analyst at BTIG, LLC, determined that the actual consideration offered under the terms of the Merger Agreement was worth only $21.90 per share in light of the then-equity prices of the Brookfield units and shares of the newly created U.S. REIT, as well as the Merger Agreement's agreed upon cash/equity ratio of 61 percent cash and 39 percent equity.[102] Sullivan's calculation was higher than Goldman's own $21.79 blended offer price calculation, as provided in its final financial presentation to the Special Committee of March 26, 2018.[103]
• Sullivan's 12-month target price for GGP was $27.50 per share.[104]Indeed, Sullivan's NAV estimate for GGP was $32.93 per share, which compares to the consensus estimate of $28.06 per share.[105] As Sullivan stated, "[w]e are surprised the Special Committee has unanimously approved the new offer and recommends that the GGP shareholders approve the proposed terms," whereby "there is no indication that GGP needs to sell the company at the present time or requires anything that [Brookfield] can provide it with . . . ."[106]
• On March 27, 2018, J.P. Morgan disseminated an equity research report valuing GGP's NAV at approximately $28 per share.[107] The report provided that, based upon discussions with investors, "the range of potential prices that had commonly been expected (in [J.P. Morgan's] view) was $25 - $27.50 . . . hence, $23.50 is considerably shy of that level."[108]
• On March 28, 2018, Julian Lin reported on Seeking Alpha that the consideration offered pursuant to the Merger "materially undervalues the underlying prime real estate" GGP owns.[109] Lin described the Merger as "very disappointing."[110]
• The cash price of $23.50 per share is lower than GGP's 52-week high of $27.10 per share (the blended value providing a negative 19.6 percent premium, as calculated by Goldman in its financial presentation to the Special Committee dated March 26, 2018), the median street price target of $24.00 per share, the mean price target of $24.65 per share, and the high street price target of $34.50 per share.[111]
• Goldman's analysis of the blended value demonstrated that the merger price provided a negative 5.8 percent premium to GGP's 1-year volume weighted average price, a negative 15.8 percent premium to GGP's 3-year VWAP, a negative 20.3 percent premium to Brookfield's own fourth quarter NAV of GGP, and a negative 16.2 percent premium to SNL Financial's consensus NAV.[112]

         Taken together, this evidence supplies a credible basis to infer the possibility of wrongdoing. To be clear, this decision need not opine as to whether Plaintiff's allegations would meet the burden for pleading a claim for breach of fiduciary duty. But Plaintiff's showing is sufficient to meet the exceptionally low standard to support a credible basis for investigating wrongdoing.

         2. Investigating Director Disinterestedness Related to the Merger

         Another proper Section 220 purpose is "to investigate questions of director disinterestedness and independence."[113] "Because director independence is a 'contextual inquiry,' potential [stockholder] plaintiffs have been admonished to employ the Section 220 process to delve into the relationship among board members . . . ."[114] For example, the Delaware Supreme Court has observed that a stockholder might use a Section 220 demand to uncover "cronyism" in the process of nominating directors, or to make sure the nomination process "incorporated procedural safeguards to ensure directors' ...


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