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Chancery Rejects Claim that Books and Records Demand was “Pretextual,” Finds Sufficient Overlap Between Demand Letter and Plaintiff’s Purpose

Donnelly v. Keryx Biopharmaceuticals, Inc., C.A. No. 2018-0892-SG (Del. Ch. Oct. 24, 2019).

A stockholder-plaintiff seeking a corporation’s books and records must have a genuine proper purpose, and cannot rely simply on a lawyer-crafted demand letter to justify her request.  There must be alignment between a plaintiff’s books and records demand and her own stated interest in seeking books and records.  In this recent decision, the Court of Chancery considers and rejects an attempt by a defendant-corporation to argue that a books and records demand was really driven by plaintiff’s counsel, and that the plaintiff lacked any genuine proper purpose.

The plaintiff was a stockholder in Keryx Biopharmaceuticals, Inc. (“Keryx”), who sought books and records relating to Keryx’s December 2018 merger with Akebia Therapeutics, Inc. (“Akebia”).  Keryx’s largest stockholder was Baupost Group Securities, L.L.C. (“Baupost”), which held 21.4 percent of Keryx’s common stock as well as senior notes that, if converted, would bring its ownership to 39 percent.  Plaintiff alleged that Baupost acted as Keryx’s controlling stockholder in connection with the merger.  Specifically, Keryx and Akebia had begun exploring a transaction in 2017, but by February 2018, discussions ceased.  Keryx then engaged a new financial advisor to explore a broader range of possible transactions.  Just two months later, with Baupost’s coordination and after Baupost had continued conducting due diligence of Akebia, Keryx and Akebia reengaged in discussions.  As part of their discussions, Baupost agreed to convert its senior notes early in exchange for $20 million in additional Keryx stock.  Certain Keryx executives, including the head of the special committee formed to consider the transaction, also secured bonuses that would trigger upon a change-in-control, or received confirmation that they would sit on a combined-company board.  After the merger was approved with a stockholder vote, Plaintiff sought books and records, expressing concerns relating to the merger price, Baupost’s influence, the bonuses, the independence and disinterestedness of the Keryx directors, and disclosure issues.

Keryx argued that the plaintiff’s purpose was pretextual.  Specifically, while his demand letter took issue with the disclosures to stockholders in connection with the merger, at his deposition the plaintiff needed prompting to recall that disclosure issues were a concern.  Keryx argued that this misalignment warranted dismissal under Wilkinson v. A. Schulman, Inc., 2017 WL 5289553 (Del. Ch. Nov. 13, 2017).  The Court distinguished Schulman, where the plaintiff actually was concerned with financial performance, not the accelerated vesting of restricted stock that was the subject of his lawyer-prepared books and records demand.  By contrast, the plaintiff's lack of focus here on disclosure issues was a minor deviation in a deposition that otherwise was consistent with his stated purpose to investigate wrongdoing. 

The Court held that the plaintiff met his burden to show that there was a credible basis to suspect potential wrongdoing in connection with the merger.  The Court concluded that plaintiff’s evidence was sufficient to suggest that Baupost had been in a control position, aided by Keryx’s directors, to press for the merger and to extract a benefit not shared by other stockholders (payment of additional stock in exchange for cancellation of indebtedness).    The Court also found there to be sufficient evidence to suggest Keryx management and directors were conflicted due to change-in-control bonuses and promised board positions with the post-merger entity.  The Court also declined the plaintiff’s request to shift fees, reasoning that, while the corporation’s reliance on Schulman was misplaced, it did not rise to the level of “bad faith.”