Category: Books and Records

Monster Books and Records; Unrequited Demands and Other Lessons for Startups and Seasoned Companies

Everyone from startups to seasoned companies and their shareholders can take a lesson from the Monster books and records demand debacle.

I know what you’re thinking:  “How lucky am I to have two books and records articles in two weeks!”

Monster Worldwide (of job board fame) was acquired and merged out of existence.  A shareholder had made a books and records demand prior to the merger but did not bring suit to enforce it until after the merger.  The demand letter said it would assume Monster would not take certain actions unless Monster said otherwise by a deadline.  Monster did nothing. Former shareholder loses.

Here’s a timeline that will be helpful:

  • August 8 – Monster and Acquiror enter into a merger agreement
  • September 6 – Acquiror commences a tender offer to Monster shareholders under the merger agreement
  • October 19 – Shareholder sends demand letter to Monster seeking access to books and records
  • October 26 – Monster rejects demand in current form but offers to cooperate on limited access
  • October 26 – Shareholder emails about the limited offer and stating that if the merger closes before he files a complaint, he expects that the company will refrain from asserting any argument that he lost standing to inspect documents because the merger closed before he filed his complaint. If the company will not refrain from making any such argument, please tell me by 10:00 a.m. Eastern time tomorrow.”
  • October 28 – Withdrawal rights for the tender offer expire; Monster responds to Shareholder refusing to refrain from anything
  • November 1 – Merger completed
  • November 4 – Monster notifies Shareholder that its request was moot since the merger occurred
  • November 22 – Shareholder files complaint

The Shareholder claimed he still had standing according to some policy arguments based on the timing of his demands to Monster, but the court noted that this was simple:

The language of Section 220(c) is plain and unambiguous. By requiring that a plaintiff under Section 220, to seek relief from this Court, demonstrate both that it “has”—past tense—complied with the demand requirement, and that it “is”—present tense—a stockholder, the legislature has made clear that only those who are stockholders at the time of filing have standing to invoke this Court’s assistance under Section 220.

Since the merger had occurred, the Shareholder was no longer a shareholder at the time of the complaint.  Therefore, he did not have standing under DGCL Section 220(c) to file a suit to enforce his right to books and records.

As we mentioned in our previous post, all corporations are bound by the books and records requirements of their jurisdiction of incorporation.  Startups are not exempt just because they like confidentiality and “stealth mode.”

Likewise, shareholders making a demand must conform to strict requirements of the statute.  A company can refuse and delay access on the basis of an improper request.

–Joe Weingarten v. Monster Worldwide, Inc.

Monster denies books and records request since it doesn't really exist anymore in its old form.
Monster Worldwide – You can have our job listings, but not our books and records

 

Do Startups and Other Private Companies Have to Provide Info to Employees?

If the employee is a stockholder, private companies, including secretive tech startups and other private emerging growth companies, must provide some company information, as confirmed by old law and new case.

Some ink is being spilled regarding the Biederman v. Domo case about a former employee and current stockholder suing Domo for financial information.  Some of the ink tells the story, but some get it wrong.  Let’s take a look.

I’m using news reports since I could not find an opinion or ruling, so accuracy may vary as we will see.

Domo usually keeps its financial information secret, like most companies.  Domo also pays its employees in stock and options, like many tech and startup companies.  Domo was richly valued in VC rounds, like many tech and startup companies.  Domo’s value may have declined, like many tech and startup companies that were richly valued in VC rounds.

Biederman wanted information about Domo’s financial condition, Domo wanted a confidentiality agreement.  Biederman refused.  According to the Information, this

“highlighted an obscure Delaware law that gives investors the right to financial information of private tech firms in which they hold stock.”

The San Francisco Business Times (the “SFBT“) misreports the Information by stating that

“The Information reports that a Delaware law applies to any privately held company that has issued more than $5 million in stock awards in a year and is incorporated in the state. The rule allows employees of any U.S. private company a right to detailed financial information — even if they work for the famously opaque and sometimes secretive tech sector.”

Let’s unpack this a bit.

First, Section 220 of the Delaware General Corporation Law is not obscure.  It is commonly invoked by stockholders who demand information.  The universe of documents available to the stockholder is limited and related to the stockholder’s purpose for requesting the information.

Second, with respect to the SFBT, Delaware law cannot apply “to any privately held company,” only those subject to Delaware’s jurisdiction.  The $5 million figure refers to SEC Rule 701, which exempts certain compensation benefit plans from SEC registration requirements and has nothing to do with Delaware law.  Basically, certain disclosure requirements are triggered if the value of equity awards in a 12-month period exceeds $5 million.

None of this is new.  There are those, particularly in the tech world, who don’t understand that old rules apply to them.  You can’t force a stockholder to sign an agreement as a condition to exercising statutory rights.  I suppose you can try, but a court may disagree.  In some states, a company may be subject to penalties for refusing access to books and records.

Generally speaking, private companies do not have to make disclosures to stockholders (employee or otherwise).  However, there are circumstances where statutes and regs require opening up, such as:

  • pursuant to a proper books and records inspection request (most states have statutes requiring this, and the request has to be in proper form);
  • while there are usually no specific disclosure requirements for stockholder meetings, fiduciary considerations apply when asking for stockholder vote, such as M&A transactions; and
  • state and federal antifraud and registration/exemption rules apply when securities are involved.
Probably a different Domo, but Domo wants his stockholder books and records information.
Probably a different Domo, but Domo wants his Biederman stockholder books and records information.