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Court of Chancery Holds Fund to be Beneficial Owner Even When it Holds a Net Short Position or Purchases Shorted Shares from its Other Accounts

Deephaven Risk ARB Trading Ltd. v. UnitedGlobalCom, Inc., C.A. No. 379-N, 2005 WL 1713067 (Del. Ch. July 13, 2005). Plaintiff Deephaven Risk ARB Trading Ltd. ("Deephaven"), an investment fund, sought to compel inspection of defendant UnitedGlobalCom's ("UGC") books and records to investigate possible wrongdoing in connection with a rights offering. In response, UGC moved to dismiss the complaint, challenging Deephaven's status as a beneficial owner and the purpose for its demand. The court denied UGC's motion. In stating that Deephaven was not a beneficial owner, UGC first argued that because Deephaven simultaneously held long and short positions in UGC stock--and the short positions were greater--Deephaven was not the beneficial owner of the shares held long. The court, however, rejected this argument, stating that there were no grounds to discount Deephaven's beneficial ownership of UGC shares because it also held off-setting short positions. UGC also argued that Deephaven was not the beneficial owner of shares it borrowed (while taking a short position) and transferred to another of its brokerage accounts. The court rejected this argument and held that Deephaven owned the shares that it purchased from itself as short-sales. Furthermore, the court held that the merger did not moot Deephaven's action to inspect the books and records of UGC. (Before the trial, UGC merged with Liberty Media International into a new company, Liberty Global, and each share of UGC stock was converted into cash or shares of Liberty Global.) The court noted that (1) Deephaven was a UGC stock holder at the time of the demand; and (2) even though the merger may have removed the possibility of derivative claims, Deephaven could assert individual or class action claims. Lastly, the court held that Deephaven showed a proper purpose by producing evidence supporting a credible basis that UGC may have issued false or misleading information in connection with the rights offering and may have treated certain foreign stockholders preferentially. Thus, Deephaven was entitled to inspect the books and records. Authored by: R. Christian Walker 302-888-6974 rwalker@morrisjames.com