SAHAGEN SATELLITE TECHNOLOGY v. ELLIPSO

• Decision Date: 27 September 2000
• Docket Number: Civil Action No. 18020 NC.
• Parties: SAHAGEN SATELLITE TECHNOLOGY GROUP, LLC, Plaintiff, v. ELLIPSO, INC., A Delaware corporation, Defendant.
• Court: Court of Chancery of Delaware

791 A.2d 794

796 Del. Ch. 2000

SAHAGEN SATELLITE TECHNOLOGY GROUP, LLC, Plaintiff, v. ELLIPSO, INC., A Delaware corporation, Defendant.

Civil Action No. 18020 NC.

Court of Chancery of Delaware, New Castle County.

Submitted: August 11, 2000.

Decided: September 27, 2000.

Stuart M. Grant, Esquire, and Megan D. McIntyre, Esquire, Grant & Eisenhofer, Wilmington, Delaware, Attorneys for Plaintiff.

Thomas R. Hunt, Jr., Esquire, Morris, Nichols, Arsht & Tunnell, Wilmington, Delaware, Attorneys for Defendant.

OPINION

LAMB, Vice Chancellor.

I.

This is an action brought pursuant to Section 220 of the Delaware General Corporation Law in which the plaintiff, Sahagen Satellite Technology Group, LLC ("SSTG"), seeks to compel an inspection of the books and records of defendant, Ellipso, Inc. Ellipso is a Delaware corporation with its principal place of business in Washington, D.C. This action is part of a broader war being waged between Peter D. Sahagen, the owner and Manager of SSTG, on the one hand, and Dr. David Castiel, Ellipso and Virtual Geo-Satellite System, LLC., on the other hand. These matters are discussed in greater detail in a recent decision of Vice Chancellor (now Justice) Steele.¹ SSTG is a stockholder of Ellipso and, on April 21, 2000, delivered to Ellipso at its principal place of business a letter demanding the right to inspect the following books and records, among other things ("Demand Letter"):²

All financial books and records of the Company and its subsidiaries from 1991 through the present, including all records pertaining to the income, expenditures, assets, and liabilities of the Company and its subsidiaries.

The Demand Letter was signed by Peter D. Sahagen, as Manager of SSTG, but was not made under oath. The letter states that the purpose of the demand is "to obtain information concerning whether Ellipso's management has mismanaged the Company by, among other things, diverting corporate assets from of [sic] the Company and failing to take advantage of corporate opportunities."

Ellipso formally rejected the requested inspection by letter dated April 27, 2000, signed by Ellipso's President and Chief Executive Officer, David Castiel. SSTG began this action seeking to compel the inspection on May 2, 2000. The matter was tried July 27, 2000, and post-trial briefing was completed on August 8, 2000.

II.

On July 25, 2000, only two days before the date set for trial, the defendant moved to dismiss the complaint on the ground that the Demand Letter was not made "under oath" as required by 8 Del. C. § 220. The pretrial order, filed the same day, also reflects defendant's contention that an oath was omitted. This ground of defense was not specifically identified in the answer filed June 1, 2000.

In its post-trial submission, Ellipso attempts to shift to plaintiff's shoulders the responsibility for the delay in identifying this defense, as follows:

Any delay in plaintiff learning about the defect in its demand is attributable to plaintiff's counsels' inexplicable delay in forwarding their sections of the pretrial order for more than 11 weeks. Indeed, plaintiff's version was not received until mid-day Saturday, July 22, 2000. Within one business day, plaintiff's counsel received defendant's sections of the pre-trial order.

The effort to avoid responsibility for the late assertion of this defense fails. Obviously, the motion to dismiss could have, and should have been, filed at the time the answer was filed, which asserted only in general terms that the complaint failed to state a claim for relief. By contrast, the pre-trial order was not due to be filed until July 25, 2000, after the completion of pre-trial discovery. And, in the context of expedited summary proceedings, it is hardly surprising that plaintiff's portion of the pre-trial order was delivered only a few days before that due date.

The Delaware Supreme Court has specifically criticized the practice of delaying the presentation of technical defenses in summary proceedings, stating:

[W]e believe that the exercise of discretion in permitting the assertion of hypertechnical defenses, not otherwise specifically pled in the answer, must turn on a good faith showing by the defendant that it could not by its own efforts and diligence determine the existence of such a defense prior to its actual assertion....³

Here, the defendant has made no such "good faith showing," and its motion must be denied. Because defendant delayed raising this technical defense until the eve of trial, I will permit Sahagen's trial testimony to supply the missing verification.

III.

SSTG's right of inspection under § 220 depends on the propriety of the purpose stated in its demand.⁴ A purpose is "proper" if it is "reasonably related to [SSTG's] interest as a stockholder."⁵ Moreover, that stated purpose must be SSTG's primary purpose.⁶ As the court said in Skouras v. Admiralty Enterprises, Inc.:

[A]lthough the court cannot, of course, read the thoughts of a stockholder, it must be satisfied that a plaintiff has successfully carried the burden of proving that the purpose behind his demand is proper. Once a proper purpose is established, it becomes irrelevant that the stockholder my have a secondary and perhaps questionable ulterior purpose behind his primary purpose.⁷

SSTG's stated purpose is to investigate waste or mismanagement in the form of "diversion of corporate assets" and a failure to "take advantage of corporate opportunities." In the circumstances, SSTG bore the burden of proving at trial, by a preponderance of the evidence, "a credible basis to find probable wrongdoing on the part of corporate management."⁸ "The threshold for a plaintiff in a Section 220 case is not insubstantial. Mere curiosity or a desire for a fishing expedition will not suffice. But the threshold may be satisfied by a credible showing, through documents, logic, testimony or otherwise, that there are legitimate issues of wrongdoing."⁹ Of course, "the actual wrongdoing itself need not be proved in a Section 220 proceeding."¹⁰

At trial, Peter D. Sahagen, the Manager of SSTG, testified about SSTG's purpose. He said that, despite repeated requests, SSTG had not received any written financial information from Ellipso since making the investment in early 1999. The absence of such financial information raises concerns for SSTG because Ellipso has raised and spent large sums in the recent past but has not appeared to make significant progress in implementing its business plan.

Sahagen also testified about information conveyed to him by employees of Ellipso that have caused him (and SSTG) to want to examine more closely the corporation's books and records. For example, the executive vice president of Ellipso told Sahagen that corporate funds were being used to pay for Castiel's personal defense in certain unspecified governmental investigations. Also, Sahagen related information conveyed to him that Castiel used corporate funds to pay for personal travel. Similarly, Sahagen said that several employees identified by him told him that Castiel had spent $48,000 of the corporation's money to buy a computer that was not worth more than $8,000 from a company run by a personal friend of Castiel. Sahagen was unsure when this alleged purchase took place.¹¹ At trial, Ellipso suggested that SSTG's actual or true purpose in making the demand is an improper one of gaining leverage over Castiel in negotiations over the purchase of Castiel's stock in both Ellipso and a related entity. And, the evidence at trial showed that SSTG first made an inspection demand on Ellipso immediately after Castiel rejected Sahagen's offer to buy him out. Sahagen testified at trial that this was "absolutely not" SSTG's real purpose in making the demand. Rather, SSTG's real purpose, according to him, was to investigate the reasons for Ellipso's quickly deteriorating financial condition and the concerns about mismanagement described above.

On the basis of the limited trial record on this issue, I reject the argument that SSTG's primary purpose in demanding inspection was to harass Ellipso or Castiel. Rather, I am satisfied that Sahagen and SSTG were genuinely concerned with what they regard as corporate mismanagement. The fact that SSTG and Sahagen are engaged in conflict with Castiel does not, in and of itself, support a conclusion that SSTG's purpose in seeking inspection of corporate books and records is improper or is intended to gain some unfair advantage in dealings with Castiel.¹² Rather, if there is a connection between the demand for books and records and SSTG's hostility to Castiel or its efforts to obtain control of Ellipso, it stems from the fact that the same concern for possible mismanagement at Ellipso animates them both.

Nevertheless, SSTG did not carry its burden of proof at trial with respect to a number of the specific items of suspected mismanagement it seeks to investigate. For example, SSTG did not adduce credible evidence to support the inference that Castiel has used corporate assets for his personal travel, or that corporate funds have been spent improperly in defending Castiel in connection with one or more governmental investigations. For this reason, I am unable to conclude from the scant evidence presented that SSTG has sustained its burden of proof to justify the wide-ranging scope of inspection it seeks. SSTG adduced enough evidence to justify its inspection of documents relating to the purchase of computer equipment. But SSTG is not seeking to inspect (in any discrete way) documents relating to that transaction. Instead, it relies on proof of that incident to justify its broader purpose of looking throughout Ellipso's records for evidence of mismanagement or waste. This broader purpose does not find adequate support in the record.

There is authority for the proposition that, where a plaintiff has sustained its burden of showing...