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Oct. 6 — A stockholder failed to establish a proper purpose to inspect Monster Beverage Corp.'s books and records because she was time-barred from bringing the derivative lawsuit she sought to bolster through those records, according to an Oct. 3 Delaware Chancery Court opinion.
Vice Chancellor John W. Noble held that the passage of seven years from the books and records request and the last of the events underlying the plaintiff's derivative lawsuit “would unjustifiably prejudice Monster.”
In September 2008, a federal securities class action was filed alleging that Monster insiders sold common stock with the benefit of nonpublic information during 2006 and 2007. The instant plaintiff was not a member of the class, and the case eventually settled in April 2014.
In October 2008, other shareholders, including the plaintiff, brought a derivative claim involving the alleged insider trading. This case, however, was dismissed because of an inability to establish demand futility.
The plaintiff in February 2012 made a demand on Monster's board to bring claims related to the alleged insider trading, which a board-appointed special committee rejected.
In March 2013, the plaintiff made a books and records demand under 8 Del. C. § 220 for the purpose of determining whether to bring another derivative action regarding the alleged insider trading. She listed as her purposes for inspection: (1) evaluating the board's refusal to act on her litigation demand and whether it constituted a reasonable exercise of the board's business judgment; and (2) evaluating the decisionmaking process behind the board's refusal to act on her litigation demand.
Monster rejected this demand, arguing that the plaintiff did not have a proper purpose because the derivative claims she wanted to bring would be “time-barred.”
The court noted that the plaintiff “concedes that her ultimate goal in pursuing her books and records request is ‘to determine whether there is a basis to bring a derivative suit' based on the ‘wrongs alleged in' the earlier derivative action.”
Under this “specific factual setting,” Vice Chancellor Noble found that the plaintiff's purpose to advance her derivative claims is not proper because those claims are time-barred
A potential affirmative defense to an anticipated action “will not necessarily defeat a books and records effort” because the books and records request can “inform consideration of other potentially wrongful conduct that is not yet time-barred,” he noted.
However, “in a specific factual setting , a time bar defense … would eviscerate any showing that might otherwise be made in an effort to establish a proper shareholder purpose.”
According to the court, the seven-year delay in this case was “unreasonable” considering that the plaintiff had “constructive knowledge” of the transactions by 2007 and participated in an earlier-filed derivative action.
Additionally, Vice Chancellor Noble rejected the argument that Monster had to identify how it would be prejudiced by the delay. Instead, he found that the delay was presumptively prejudicial under the circumstances “because of fading memories and protracted distractions diverting management's attention from the needs of the corporation.”
Vice Chancellor Noble additionally found that the federal securities litigation did not toll the statute of limitations or the period for evaluating a laches defense because the plaintiff was not a member of that class action.
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The opinion is available at http://www.bloomberglaw.com/public/document/Wolst_Anastasia_vs_Monster_Beverage_Corp_2014_BL_277533_Del_Ch_Oc.
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