Mehta v. Kaazing Corporation
CA 2017-0087-JRS
| Del. Ch. | Sep 29, 2017Background
- Kaazing Corporation, a Delaware corporation, experienced financing activity (Series B, C, bridge financings, and a later "Series 1" recapitalization) and leadership changes after Vikram Mehta was terminated as CEO in April 2015.
- Mehta (former CEO and stockholder) alleged that after his termination certain investors—particularly CNTP—received preferential treatment in financings and that management hires (Miller and Floyd) received unusually generous compensation.
- Mehta served a § 220 demand (Jan. 10, 2017) seeking books and records to value his shares and to investigate possible mismanagement, waste, or wrongdoing relating largely to the 2016 bridge financing and Series 1 financing. Kaazing initially challenged the demand's form and purpose but produced many documents and agreed to produce additional items.
- At trial the court assessed whether Mehta satisfied § 220’s requirements (stockholder status, form/manner, and proper purpose) and whether requested records were necessary and essential to his stated purposes.
- The Court found Mehta established a proper purpose to investigate mismanagement/wrongdoing (low threshold: some evidence/credible basis) but not a present need to value his shares, and it limited disclosure to materials necessary and essential to that investigation.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Proper purpose under § 220 | Mehta: inspection to value shares and investigate mismanagement/waste/wrongdoing tied to bridge and Series 1 financings | Kaazing: Mehta seeks documents for litigation/private vendetta and to obtain discovery beyond § 220; valuation purpose not bona fide | Court: Mehta proved a proper investigative purpose (mismanagement) by a low "credible basis" standard; valuation purpose not shown as currently necessary |
| Standard to justify inspection for wrongdoing | Mehta: presented circumstantial evidence (financial posture before/after termination; preferential treatment of CNTP; dilutive transactions) | Kaazing: offered contrary explanations; argued plaintiff’s proof insufficient and requests overbroad | Court: applied Seinfeld low threshold (some evidence/credible basis) and found Mehta crossed it for investigating preferential treatment and certain compensation issues |
| Scope: General ledger request | Mehta: needed general ledger to see how funds were spent and to detect excessive payments/bonuses | Kaazing: produced financial statements, board materials, transaction docs; general ledger is overly broad and duplicative | Court: denied general ledger—financial and board documents already provided make ledger unnecessary and request reflected general curiosity |
| Scope: Board constitution and related records | Mehta: needs records to test whether Board/subcommittees were disinterested or illegally reconstituted | Kaazing: already will produce minutes and board materials | Court: denied separate broad request for documents about board constitution because minutes and produced materials suffice; allowed production of final signed minutes and presentations |
| Scope: Investor communications and transaction discussions (categories 2 & 4) | Mehta: communications with CNTP, NEA, Intel, SQN, syndicate members after Feb. 28, 2016 are necessary to investigate preferential treatment | Kaazing: argued burden/overbreadth but offered many documents | Court: granted these categories as sufficiently targeted and necessary to investigate alleged preferential treatment |
| Scope: Employment exhibits for Miller and Floyd | Mehta: seeks all exhibits to Miller and Floyd employment contracts to investigate excessive compensation/conflict | Kaazing: agreed to produce employment agreements and related documents | Court: ordered production of exhibits to those employment agreements, to the extent they exist |
Key Cases Cited
- Wal-Mart Stores, Inc. v. Indiana Elec. Workers Pension Trust Fund IBEW, 95 A.3d 1264 (Del. 2014) (§ 220 inspection limited to records necessary and essential to stockholder's proper purpose)
- Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752 (Del. Ch. 2016) (courts tailor § 220 relief to the quantum of information sufficient to accomplish plaintiff's purpose)
- Seinfeld v. Verizon Commc’ns, Inc., 909 A.2d 117 (Del. 2006) (plaintiff meets § 220 burden to investigate wrongdoing by showing some evidence that provides a credible basis for possible mismanagement)
- Espinoza v. Hewlett-Packard Co., 32 A.3d 365 (Del. 2011) (discussing limits on § 220 disclosure and necessity requirement)
- Thomas & Betts Corp. v. Leviton Mfg. Co., 681 A.2d 1026 (Del. 1996) (procedural standards and burden for § 220 demands)