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Court of Chancery Finds Proper Purpose in Books and Records Case Where Beneficial Owners Demonstrate that CEO Received Excessive Compensation

Haywood v. Ambase Corp., C.A. No. 342-N, 2005 WL 2130614 (Del. Ch. Aug. 22, 2005). Plaintiffs Haywood and Cronin were beneficial owners of defendant AmBase Corporation's ("AmBase") common stock. Ambase was a publicly held Delaware corporation, and its primary purpose at the time was to pursue pending litigation against the United States government based on the impact of the Financial Institutions Reform, Recovery and Enforcement Act. Richard Bianco was the chairman and chief executive officer of AmBase. Haywood and Cronin brought an action for inspection of the books and records of AmBase after learning that Bianco was receiving compensation and benefits that were excessive. After confronting Bianco, and not receiving a sufficient explanation, they made a written demand to inspect AmBase's books, which AmBase refused. The court held that plaintiffs demonstrated a proper purpose, which was to investigate possible mismanagement, breaches of fiduciary duty, waste of corporate assets, and fraud. The court found that plaintiffs demonstrated a credible basis to find wrongdoing because, among other reasons, (1) Bianco's annual compensation amounted to approximately 10% of the market capitalization of AmBase; (2) an independent consultant reported specific facts and statistical analyses supporting plaintiffs' belief that Bianco was overcompensated (by receiving total compensation in the 100th percentile of comparable companies); and (3) that the personnel committee awarded Bianco significant discretionary bonuses despite the fact that the plan's criteria for awarding bonuses were not met. The court, however, did not find AmBase liable for Haywood and Cronin's attorneys' fees because, among other reasons, there was no evidence of intentional misconduct by AmBase, and there was a colorable argument that Bianco's compensation was a business decision. Authored by: R. Christian Walker 302-888-6974 rwalker@morrisjames.com