Court Nixes Records Demand Driven by `Entrepreneurial’ Law Firm

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By Yin Wilczek

Plastics maker A. Schulman Inc. fended off a shareholder’s bid to access records on its board’s decision to accelerate the vesting of restricted stock for the company’s CEO when he retired in 2014.

The Delaware Chancery Court’s Nov. 13 ruling denying shareholder Jack Wilkinson’s books and records inspection request shows the court’s increasing concern about how some plaintiffs law firms may be trying to drum up cases in the state.

The chancery court found that Wilkinson didn’t have a proper purpose to review the records because the facts showed the inspection demand was driven by a law firm ( Wilkinson v. A. Schulman, Inc. , 2017 BL 405315, Del. Ch., No. 2017-0138-VCL, 11/13/17 ).

A “stockholder seeking an inspection and retaining counsel to carry out the stockholder’s wishes is fundamentally different than having an entrepreneurial law firm initiate the process, draft a demand to investigate different issues than what motivated the stockholder to respond to the law firm’s solicitation, and then pursue the inspection and litigate with only minor and non-substantive involvement from the ostensible stockholder principal,” Vice Chancellor J. Travis Laster wrote.

The court identified the law firm as Levi & Korsinsky LLP. It said Wilkinson had served as plaintiff for the firm in at least seven lawsuits, mostly involving merger challenges.

Under Delaware law, stockholders may inspect a company’s books and records for any “proper” purpose.

Not Typical

It isn’t typical for the court to call out plaintiffs firms in such a manner, said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.

There is growing concern in the chancery court about some aspects of corporate litigation in the state, and what it sees as “some of the excesses” of plaintiffs firms, Elson told Bloomberg Law. The latest ruling is part of a broader move by the court to curb needless litigation, he said. Elson also cited the court’s decision last year to more closely scrutinize merger litigation involving disclosure-only settlements.

In such settlements, shareholders agree to broadly release the company from their lawsuit in exchange for supplemental disclosures. While the shareholders don’t receive any money in the resolution, their lawyers are paid attorneys’ fees by the defendants. The chancery court’s closer review of the pacts has led to fewer merger challenges in Delaware, according to Cornerstone Research, which tracks shareholder litigation.

Wilkinson’s attorney, Michael Van Gorder, Faruqi & Faruqi LLP, Wilmington, Del., didn’t immediately respond to a request for comment. A. Schulman’s attorney, Stephen Norman from Potter, Anderson & Corroon LLP, Wilmington, declined to comment.

In his inspection demand, Wilkinson argued that A. Schulman’s former president and chief executive officer, Joseph Gingo, was entitled only to a pro rata vesting of the shares over time. By accelerating the vesting, the company caused an additional 107,775 shares to vest, worth almost $4 million. The shareholder said the board’s decision violated the Fairlawn, Ohio-based company’s compensation plan.

To contact the reporter on this story: Yin Wilczek in Washington at ywilczek@bna.com

To contact the editor responsible for this story: Seth Stern at sstern@bna.com

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