Shaw v. Agri-Mark, Inc.

• Citation: 663 A.2d 464
• Decision Date: 06 July 1995
• Docket Number: No. 83,AGRI-MAR,1995,INC,83
• Parties: Karen SHAW and Forrest Foster, Plaintiffs Below, Appellants, v., Defendant Below, Appellee. . Submitted:
• Court: United States State Supreme Court of Delaware

Page 464

663 A.2d 464

64 USLW 2163

Karen SHAW and Forrest Foster, Plaintiffs Below, Appellants, v. AGRI-MARK, INC., Defendant Below, Appellee.

No. 83, 1995.

Supreme Court of Delaware.

Submitted: July 6, 1995.

Decided: Aug. 2, 1995.

Upon Certification of Questions of Law from the United States Court of Appeals for the Second Circuit. THE CERTIFIED QUESTIONS ARE ANSWERED IN THE NEGATIVE.

Noel E. Primos, Schmittinger and Rodriguez, Dover, and Robert A. Gensburg (argued), St. Johnsbury, VT, for appellants.

Jesse A. Finkelstein (argued), and Lisa A. Schmidt, Richards, Layton & Finger, Wilmington, and Robert B. Hemley and Dennis R. Pearson, Gravel and Shea, Burlington, VT, for appellee.

Before WALSH, HOLLAND, and BERGER, JJ.

WALSH, Justice:

This matter is before the Court as the result of the certification of two questions of law pursuant to Article IV, Section 11(9) of the Delaware Constitution and Delaware Supreme Court Rule 41. The questions of law have been certified by the United States Court of Appeals for the Second Circuit and were accepted by this Court by order dated March 10, 1995. The certified questions are the following:

(1) Did persons who supplied equity capital to a cooperative stock corporation and directly elected its directors, but who were not stockholders of record, have a right under Delaware common law to inspect the corporation's books and records?

(2) If the answer to question (1) is yes, did that right survive the enactment of 8 Del.C. § 220?

We conclude that a party who supplies equity to a stock corporation, but who is not a stockholder of record, does not have a right to inspect the corporation's book and records under Delaware common law. We thus answer the first certified question in the negative. ¹

I

The following undisputed facts were set forth in the Certificate of Questions of Law ("Certificate") submitted by the Second Circuit to this Court. ² Appellee Agri-Mark, Inc. ("Agri-Mark") is a cooperative stock corporation organized under the Delaware General Corporation Law, 8 Del. C. § 101 et. seq., with its principal place of business in Methuen, Massachusetts. Its business consists of processing, handling and marketing milk and other dairy products of its "producer members," farmers in the New England states and New York. Appellants are Vermont dairy farmers who have signed a Member Marketing Agreement ("Marketing Agreement") with Agri-Mark. The Marketing Agreement is a contract by which the "member" of Agri-Mark agrees to sell all of his or her milk or milk products to Agri-Mark, and, in exchange, Agri-Mark agrees to market such dairy products to the public. Agri-Mark's equity base is comprised entirely of member contributions to the corporation and retained earnings from the proceeds of Agri-Mark's milk marketing operations.

Agri-Mark's corporate governing structure is largely determined by its bylaws, which are incorporated by reference into each Marketing Agreement. The cooperative is divided into geographical sections and regions. Each section, consisting of at least twenty members, elects a number of delegates to the region equal to the number of members in the section divided by twenty. Each region is a geographical area containing between 100 and 275 members. There must be at least fifteen regions in the cooperative, each of which must contain at least two sections. Agri-Mark's bylaws provide that every member is entitled to one vote at regional and sectional meeting regardless of the size or number of farms the member owns. The Board of Directors of Agri-Mark is selected at the cooperative's regional meetings with members from each region electing one director. Members from each region also elect voting representatives to represent the region at cooperative meetings.

The stock of Agri-Mark is held by those who are elected to its Board of Directors. Each director is issued one share of Agri-Mark stock in exchange for one dollar. The directors constitute the only Agri-Mark stockholders of record. At the expiration of each director's term, he or she must sell his or her share back to Agri-Mark for one dollar. Only directors are permitted to vote at annual or special meetings of the stockholders. The bylaws provide that a special meeting of the cooperative must be called by the chairman or secretary of the corporation if requested by ten percent of its members. At this meeting, the regional representatives vote. With respect to any matter on which Delaware law guarantees stockholders a right to vote, the directors as a group are required to vote in accordance with the instruction of the regional voting representatives as a group.

Although the members of Agri-Mark supply the corporation with its equity and directly elect its directors, they are not stockholders of record, since the by-laws limit that status to directors. Appellants are not presently, nor have they ever been, directors of Agri-Mark.

Appellants brought an action in Superior Court in the State of Vermont seeking an order to compel Agri-Mark to allow them to inspect its books and records. Specifically, appellants sought to inspect, inter alia, Agri-Mark's membership list, as well as salary information concerning the five highest-paid executives of Agri-Mark. Agri-Mark removed the case to the United States District Court for the District of Vermont based upon diversity of citizenship. See 28 U.S.C. § 1332. The District Court entered judgment in favor of appellants on the ground that, although not stockholders of record, appellants were among the real equity owners of Agri-Mark and, having demonstrated a "proper purpose" in seeking to inspect the membership list and executive compensation of Agri-Mark, they should be permitted the right of inspection as members of the cooperative under Delaware common law.

Agri-Mark then appealed to the United States Court of Appeals for the Second Circuit. ³ The District Court stayed its judgment pending the appeal, noting that "the central issue is a purely legal question." After briefing by the parties and oral argument, the Second Circuit certified two questions of law to this Court. This is the decision of the Court on the certified questions.

II

It is well established that, as a matter of common law, a stockholder of a Delaware corporation possessed a qualified right to inspect or examine the stock ledger, as well as the books and records of the corporation. Rainbow Nav., Inc. v. Pan Ocean Nav., Del.Supr., 535 A.2d 1357, 1359 (1987); State ex rel. Healy v. Superior Oil Corp., Del.Super., 13 A.2d 453, 454 (1940); State ex rel. Cochran v. Penn-Beaver Oil Co., Del.Supr., 143 A. 257 (1926). The stockholder's common law right of inspection may not be divested except by statutory enactment. Rainbow Nav., 535 A.2d at 1359; BBC Acquisition Corp. v. Durr-Fillauer Medical, Inc., Del.Ch., 623 A.2d 85, 90 (1992). At common law, the right of inspection was enforceable only through the issuance of a writ of mandamus from the Superior Court compelling the corporation to permit inspection by the stockholder. State ex rel. Richardson v. Swift, Del.Super., 30 A. 781, 781-82 (1885) ("Swift I "), aff'd, Swift v. State ex rel Richardson, Del.Ct.Err. & App., 6 A. 856 (1886) ("Swift II ").

The writ of mandamus was an extraordinary remedy, not issuable as a matter of right. State ex rel. Thiele v. Cities Service Co., Del.Supr., 115 A. 773, 774 (1922). Its issuance was within the sound discretion of the court, depending upon the particular circumstances of each case. Id.; State ex rel. Brumley v. Jessup & Moore Paper Co., Del.Supr., 77 A. 16, 22-23 (1910); State ex rel. Miller v. Loft, Inc., Del.Super., 156 A. 170, 171-72 (1931). For a writ of mandamus to issue, "[t]he right which it is sought to protect must [ ] be clearly established." Swift II, 6 A. at 861. The stockholder was therefore required to make specific factual averments in the petition to show clearly that he or she was entitled to the relief (inspection) sought. Swift I, 30 A. at 785. In other words, the stockholder was required to demonstrate to the court "those special circumstances which would justify it in interposing its mandatory process in his behalf." Thiele, 115 A. at 775.

As noted, the common law right of inspection was not absolute. In order to enforce inspection rights by writ of mandamus, the stockholder demanding inspection had to show that the inspection was for "proper purposes." See Brumley, 77 A. at 20 (noting that the common law right of a stockholder "to inspect the books of the corporation at a proper time, for proper purpose ... is a principle of law long ago recognized in this state."). Although hardly self-defining, a proper purpose was viewed under the common law as a purpose relating to the interest that the stockholder sought to protect by seeking inspection.

It is well settled that [the common law right of inspection] should not be granted for speculative purposes or to gratify mere idle curiosity, and that the purpose of the petitioner in asking for the writ must be a proper and reasonable one, and the interest which he seeks to protect must be such as to warrant and justify the remedy he invokes.

State ex rel. De Julvecourt v. Pan-American Co., Del.Super., 61 A. 398, 400 (1904), aff'd, Del.Supr., 63 A. 1118 (1906). In other words, the propriety of a demanding stockholder's purpose was measured by whether it related to the stockholder's interest qua stockholder, that is, a proper purpose in seeking inspection was viewed as a purpose germane to the petitioner's interest or status as a stockholder.

At common law, the right to inspect corporate books was a qualified right, and allowable only when the stockholder was actuated by motives that were lawful and proper and by a purpose to subserve [sic] his interests as a holder of the corporate stock.

Thiele, 115 A. at 775.

In short, a stockholder's right to inspection is status-related. See Swift I, 30 A. at 783 ("The right of [a...