IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
MICHAEL STOCK, ) ) Plaintiff, ) ) v. ) C.A. No. 2023-0109-LM ) SUSTAINABLE ENERGY ) TECHNOLOGIES, INC., ) ) Defendant. )
FINAL POST-TRIAL REPORT
Final Report: October 30, 2023 Date Submitted: July 28, 2023
Thomas E. Hanson Jr. & William J. Burton, BARNES & THORNBURG LLP, Wilmington, Delaware; Attorneys for Plaintiff Michael Stock.
Tyler J. Leavengood, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Attorney for Defendant Sustainable Energy Technologies, Inc.
Mitchell, L. Defendant Sustainable Energy Technologies, Inc. is a national supplier of
energy storage devices or Power Packs that replace lead acid and lithium-ion
batteries in various markets. The plaintiff, Michael Stock, owns 2.1 million shares
of stock in the defendant company. Plaintiff alleges that since his initial investment
in the company, it has paid its officers excessive compensation while failing to make
significant progress in bringing their alternative battery technology to market. He
blames the excessive compensation arrangement for why the company generated
little to no revenue in 2022—in stark contrast to its projected 2022 revenue of $27.8
million.
To uncover how the company used his investment, investigate further claims
of mismanagement of funds, and value his shares, the Plaintiff sought to inspect
Sustainable Energy Technologies, Inc.’s books and records pursuant to Section 220
of the Delaware General Corporation Law. The company initially offered the
Plaintiff some of the requested records but conditioned the offer on the execution of
a mutually agreeable confidentiality agreement. The Plaintiff failed to execute the
agreement and in turn, the company refused to release the information.
Following the initial demand, the Plaintiff was voted off the company’s board
of directors. He then sought to formalize and legitimize an alleged handshake deal
he had with the defendant company through his own private company for exclusive
distribution rights. The defendant company rejected ever having an agreement.
2 Having never received any of the earlier requested documents, the Plaintiff
renewed his demand submitting another request. Defendant company never
responded to the second request. On January 30, 2023, Plaintiff filed this complaint.
Following a one-day trial held on July 7, 2023, in New Castle County,
Delaware, the parties submitted post-trial briefing. After reviewing the parties’ post-
trial submissions, trial evidence, pre-trial briefing and supportive memoranda, I find
that Plaintiff has both, stated a proper purpose for inspection under Section 220 and
has met his minimal burden of establishing a credible basis for suspected
wrongdoing under Section 220. However, I do not agree that all the documents
Plaintiff seeks are necessary and essential for Plaintiff’s stated purposes. To that
end, I recommend Plaintiff’s demand be granted with respect to those documents
which are necessary and essential and deny the demand with respect to all others.
This is my final report.
I. BACKGROUND 1 Sustainable Energy Technologies, Inc. (“SETI” or the “Company”), is a
Delaware corporation headquartered in Elkhart, Indiana and offers its patented
1 All facts cited herein are taken from the trial transcript, cited as “Tr. __”; the parties jointly submitted exhibits list, cited as “JX __”; the parties opening briefs respectively as “DOB” and “POB”; the Joint Pre-Trial Stipulation and Order, cited as “PTO and filed on the Docket as (“Docket Item”) D.I. 68; and the parties post-trial briefs respectively as “PPB” and “DPB”.” 3 Hybrid Graphene Super Capacitor Power PackTM (“Power Pack”) – a substitute for
lead-acid, nickel-cadmium and lithium-ion batteries.2 According to the executive
summary in its business plan, “SETI [] is a national supplier of energy storage
devices or Power Packs that replace lead acid and lithium-ion batteries in various
markets.” 3
SETI is managed by a board of directors not to exceed seven members.4
Pursuant to SETI’s bylaws, the Company “may establish a reasonable compensation
of all directors for services to the corporation … or may delegate such authority to
an appropriate committee.”5 Chris Sanders (“Sanders”) is SETI’s CEO. 6 Fred
Solomon (“Solomon”) is a former chairman of the board of directors.7 Sanders and
Solomon are related. 8 Additionally, Sanders is married to SETI’s chief
administrative officer, Tara Brown (“Brown”).9
2 PTO at 8; JX 1; JX 50 at 3. 3 JX 50 at 3. 4 JX 1 at 13. 5 JX 1 at 14-15. 6 PTO at 8. 7 Tr. 13:2-5. 8 Solomon is Sander’s stepfather. PTO at 8. 9 PTO at 9. 4 Michael Stock (“Plaintiff” or “Stock”) was the founding investor and a former
member of the board of directors of SETI. 10 Prior to his involvement with SETI,
Plaintiff worked in the RV industry in Elkhart, Indiana, where he grew up.11
Eventually, Plaintiff formed a sales and marketing company, MITO12, primarily
serving RV manufacturers in the Elkhart, Indiana market.13 Based on his familiarity
with the area, Plaintiff was uniquely situated in understanding the “beachhead”
markets in Indiana. 14
A. SETI’s Business Plaintiff’s knowledge about “all of the problems about energy storage in the
RV industry” drew him to SETI and he was eventually put into contact with
Sanders. 15 The same day they connected on the phone, Sanders drove from Fort
Myers, Florida to meet with Plaintiff at his home in Naples, Florida.16 Sanders was
trailering a golf cart equipped with a Power Pack battery. 17
10 Tr. 102:9-14. 11 Tr. 102:5-14. 12 MITO stands for “Mike and Tom.” Tom Fuller is Stock’s business partner. Tr.102:11- 14. 13 JX 50 at 26. 14 Beachhead markets are those most “fruitful” to SETI’s business, which included golf carts, RVs and the marine industries. Tr. 44:14-15; JX 208. 15 Tr. 104:2-18. 16 Tr. 100:19; 104:16-24. 17 Tr. 104:22-24. 5 After meeting with Brian Nangle (“Nangle”), SETI’s president, Plaintiff was
convinced that “[Power Packs] [are] a product that could be very useful in the
marketplace.”18
Plaintiff made his initial investment in SETI in December 2019, purchasing
1,000,000 shares for $500,00.00 – fifty cents per share.19 Plaintiff purchased an
additional 1,000,000 shares the following month, in January of 2020.20 From the
time of his first purchase in December 2020 until September 2022, Plaintiff was a
member of the Company’s board of directors.21
Plaintiff maintains that as part of his joining SETI, MITO was to receive an
exclusive distribution agreement to service the “beachhead” market in Elkhart,
Indiana.22 Plaintiff alleges that before his initial investment, Sanders made
representations to him that SETI was “looking for an investor to secure the exclusive
license for the United States” from Dongguan City Gonghe Electronics Co. LTD
(“Gonghe”).23 Stock testified that he agreed, but only for “something in return.”24
18 Tr. 106:23-24. 19 JX 3 at 2. 20 JX 15. Plaintiff subsequently made another 100,000-share purchase from Sanders, bringing his total to 2,100,000 shares of SETI. PTO at 9; Tr. 114:1-6. 21 PTO at 28. 22 Tr. 157-158. 23 Tr. 108:12-20. 24 Id. 6 Following his investment, Stock said that he and Sanders “shook” on a deal giving
Stock “the Northern Indiana distributorship for the RV, marine, and the markets [he]
work[ed] in.25
B. SETI’s Agreement with Gonghe Electronics
During Plaintiff’s tenure on the board, SETI entered into an Exclusive
Distribution and Business Collaboration Agreement with Gonghe on June 15, 2021
(the “Gonghe Agreement”).26 In the Gonghe Agreement, Gonghe appointed SETI
as its exclusive distributor for its Graphene Supercapacitor Battery Cells and Packs
with integrated Capacitor Management Systems.27 SETI represented its relationship
with Gonghe in its business plan (“Business Plan”).28 The business plan also
references MITO, indicating that they are a “sales partner” and that they are
“responsible for SETI’s marketing, sales, warehousing, and inventory
management.”29 There is no indication that MITO has an exclusive sales distribution
agreement with SETI in the Business Plan.
25 Tr. 109:18-24. 26 JX 6. 27 JX 6. 28 JX 50 at 3 (“SETI’s founders and executive team [] secured an Exclusive Sales, Distribution and Business Collaboration Agreement for the Hybrid Super Capacitor Power Packs with GongHe Electronics Limited for the US markets.”). 29 JX 50 at 4. 7 C. SETI’s Private Placement Memorandum
SETI also implemented a Private Placement Memorandum (“PPM”) geared
at enticing investors to put money into SETI’s business.30 Stock alleges the PPM
was misleading in its representations about MITO. 31 The PPM stated that SETI had
“partnered with MITO” and that negotiations had begun between SETI and MITO
“to enter into a contract for leasing, inventory management, marketing, and sales and
distribution services.” 32 The next paragraph in the PPM reveals that “the Company
has entered into an Exclusive Distribution Agreement with Gonghe Electronics.”33
Plaintiff, when pressed, conceded that like the Business Plan, the PPM did not
identify an exclusive distribution agreement between SETI and MITO. 34
D. Management Compensation On January 25, 2022, William Harrington, another SETI board member,
circulated an email to the SETI board attaching recommendations for compensation
to be considered at a board meeting the following day.35 The compensation
30 JX 51. 31 Tr. 144:5-14. 32 JX 51 at 20; see also JX 51 at 12 (“The Company has partnered with MITO… which supports the Company with offices, warehousing facilities, inventory management, research, marketing, and sales and distribution.”) (Emphasis added). 33 Id. 34 Tr. 160-161. 35 JX 69. 8 committee recommended Sanders and Chief Technology Officer David Strumpf
(“Strumpf”) be “granted significantly and timely salary increases”, with Sander’s
salary rising to $500,000 from $360,000.36 Amid obvious concerns about the
increases and SETI’s burn rate, the board, temporarily deferred consideration of
compensation.37
In response to the apparent concerns over compensation, Nangle offered to
“reduce by 70%” his compensation following the January 26 board meeting “until
such time as the planned further raise of [$5,000,000 additional funding was]
complete.”38 Wen Wu, another member of the SETI board and an important liaison
with Chinese based Gonghe for linguistic reasons, resigned from the board following
the compensation talks.39 According to Lyons, Wu “was frustrated that there was
what he believed [was] excessive compensation.” 40
The board readdressed compensation at the April 7, 2022 meeting. 41 The
compensation being paid to Sanders, Solomon, and Brown worried Plaintiff and
36 Id. at 3. 37 JX 75 at 1. 38 JX 75 at 1. 39 Tr. 20:1-15. 40 Tr. 20:9-10. 41 JX 110; Tr. 57:24-58:1. 9 other board members.42 Craig Lyons (“Lyons”), owner of Lyon Legacy Trust and a
member of the SETI board, expressed his concerns regarding compensation at
trial.43 Lyons voted against the compensation committee’s recommendation.44
Nangle and Strumpf, along with Plaintiff, also abstained from the vote. 45 Sanders,
Solomon, and Harrington voted in favor of the compensation committee’s
recommendation.46 Thus, on April 7, 2022, the board approved the compensation
amounts by a vote of three to one, with three abstentions.47
E. Plaintiff’s Demands Plaintiff served his initial demand for books and records on SETI September
2, 2022 (“First Demand”). 48 In response, Sanders scheduled a board meeting on
42 Tr. 58:23-24. 43 Tr. 54:6-16 (“My concern was…pay ourselves, paying the team, too much. … I was frustrated that the first thing we did [after raising capital] is go and try and pay people more.”). 44 Tr. 57:15-16. 45 Tr. 57:21-22. 46 JX 110; Tr. 57:22-24. 47 JX 110; Tr. 57:24-58:1; Tr. 177:9-12. Sanders ultimately stayed at his previous salary of $360,000 and Plaintiff conceded at trial that he did not vote against the proposed compensation for Sanders, Solomon, or Brown when their salaries were originally set. See Tr. 177-181; but see Tr. 181:21-22 (“I always thought the salaries were way too high. Always.”). Rather, Plaintiff abstained from the vote on Sander’s compensation. JX 110 at 3. 48 JX 171. 10 September 6, 2022, which Plaintiff attended. 49 Sanders initiated the board meeting
“to discuss the [First Demand].”50
The First Demand sought:
(a) Any and all records pertaining to [Plaintiff’s] investment in SETI including but not limited to: i. Shareholder agreements; ii. Marketing materials; iii. All emails pertaining to [Plaintiff’s] investment; iv. Bank records; v. Correspondence of any kind and in any form; vi. Any written agreement related to or pertaining to the investment of [Plaintiff] in SETI. (b) Any and all records pertaining to SETI’s Investment in MTPV, including but not limited to: i. Shareholder agreements; ii. Marketing materials; iii. All emails pertaining to [Plaintiff’s] investment; iv. Bank records; v. Correspondence of any kind and in any form; vi. Any written agreement related to or pertaining to the investment of [Plaintiff] in SETI. (c) Excerpts from minutes of any meeting of the Board of Directors, records of any action of a committee of the Board of Directors while acting in the place of the Board of Directors on behalf of the corporation, minutes of any meeting of the shareholders, and records of action taken by the shareholder or Board of Directors without a meeting from January 2020 through July 2022. (d) Accounting records of the corporation covering the period of January 2020 through July 2022; (e) The records of shareholders; (f) Any other books and records; (g) The Corporation’s Articles or restated Articles of Incorporation and all amendments to them currently in effect; (h) The Corporation’s Bylaws or restated Bylaws and all amendments to them currently in effect; (i) Resolutions adopted by the Corporation’s Board of Directors in January 2020 through July 2022 creating one or more classes or series of shares and fixing the relative rights, preferences, and
49 JX 172 at 2; JX 173. 50 Id. 11 limitations, if shares issued pursuant to those resolutions are outstanding; (j) The minutes of all shareholders meetings and records of all actions taken by shareholders without a meeting in January 2020 through July 2022; (k) All written communications to all shareholders generally or all shareholders of a class or series in January 2020 through July 2022, including financial statements furnished under Delaware Statutes; (l) A list of the names and business street address of the Corporation’s current Directors and Officers; (m) The Corporation’s most recent annual report delivered to the Department of State under Delaware law; and (n) All records of the Corporation, including all records reflecting all activity in January 2020 through July 2022.” 51
According to the First Demand, Plaintiff’s purpose for requesting the
documents was “for [Plaintiff] to determine the financial status of [SETI] as well as
the activity of the Corporation from January 2020 through July 2022.” 52
In response to the First Demand, SETI confirmed its willingness to turn over
certain documents. 53 Namely, SETI would turn over (1) any restatements or
amendments to SETI’s incorporating documents or bylaws, (2) employment
agreements, (3) 2021 and 2022 financial statements, (4) any promissory notes for
which there is an amount due, (5) a stockholder list, and (6) the final versions of all
written consents and minutes of any meetings of stockholders or directors. 54
51 JX 171 at 4. 52 JX 171 at 5. 53 JX 204. 54 JX 204 at 1-2. 12 SETI also proposed a confidentiality agreement to Plaintiff. Stock did not
execute the confidentiality agreement and seemed at trial to be unsure of why it was
never done.55 Nevertheless, Plaintiff did not receive any documents from SETI in
response to his First Demand.
Following Plaintiff’s First Demand, the board voted to remove Plaintiff as a
board member. He was officially removed from the board on September 16, 2022.56
The same day, Plaintiff’s counsel forwarded SETI’s counsel a letter formally
demanding that SETI and MITO formalize their distribution agreement.57 SETI’s
counsel responded stating that “SETI not only refuses to provide a draft of such a
document, but it vehemently denies that any such distribution rights were offered to
MITO or [Plaintiff].”58
Plaintiff made another demand for books and records on January 9, 2023 (the
“Demand”).59 Plaintiff’s Demand requested different documents, seeking:
1. All notices, minutes, consents and resolutions of the Board, and any Board committees, related to the Company's distributorship relationships, investor solicitations, Mr. Stock's termination and/or the use of investor funds from January 1, 2020, to the present;
55 See Tr. 238-240; Tr. 240:14-15 (Stock testified that he “had no problem [signing] a confidentiality agreement.”). 56 Tr. 226:22-227:4. 57 JX 183. 58 JX 185. 59 JX 208. 13 2. The Company's articles of incorporation and bylaws, including any amendments thereto; 3. All employment agreements between the Company and any officers or other employees of the Company from January 1, 2020, to the present; 4. All documents and communications related to any bonus or other compensation received by any officers or other employees, or third parties (including Company counsel, Don Weinbren) of the Company from January 1, 2020 to the present; 5. All documents and communications related to Mr. Stock's investment in the Company, including any shareholder or other agreements, marketing materials and/or bank records; 6. All documents and communications related to MITO serving as a distributor for the Company or any offer for MITO to so serve; 7. All documents and communications related to Mr. Stock's service on the Company's Board; 8. All documents and communications related to the PPM and Business Plan, including any divergence from the plans stated therein; 9. All documents and communications related to the Company's agreement with Gonghe Electronics, including any defaults thereunder. 10. All communications and agreements with existing or potential investors in the Company; 11. True and full information regarding the status of the business and financial condition of the Company, including the development of its Power Packs and other key products; 12. Full and proper ledgers, other books of account, and records of all receipts and disbursements, other financial activities, and the internal affairs of the Company for 2020, 2021 and 2022 YTD; 13. Audited and/or unaudited financial statements, including a balance sheet, a statement of income and loss, a statement of cash flow, along with accompanying footnotes, and any semi-annual reports, for the Company for 2020, 2021 and 2022 YTD; 14. Copies of the Company's federal, state and local income tax returns for the years 2020 and 2021; 15. A current list of the name and last known business, residence and/or mailing address of each stockholder of the Company; and
14 16. The names and contact information for each officer and director of the Company, including his or her date of appointment or election.”60
II. PROCEDURAL POSTURE
Plaintiff filed this action pursuant to 8 Del. C. § 220 on January 30, 2023,
seeking to inspect SETI’s books and records.61 SETI answered the complaint on
February 22, 2023.62 Following SETI’s answer, both parties moved to compel
discovery from each other.63 Prior to hearing arguments on the motions, this case
was reassigned to me by the Chancellor. 64 On May 23, 2023, I heard oral arguments
on the motions to compel, denying Plaintiff’s motion and granting in part the
Company’s.65 Following a one day trial in Wilmington, Delaware on July 7, 2023,66
the parties submitted post-trial briefing.67
60 JX 208. 61 D.I. 1. 62 D.I. 10. 63 D.I. 20, 22. 64 D.I. 42. 65 D.I. 50-51. 66 D.I. 71. 67 D.I. 74, 75. 15 III. LEGAL STANDARD
Section 220 “provides stockholders with a qualified right to inspect corporate
books and records.”68 To obtain books and records, “a stockholder must satisfy the
statute’s form and manner requirements.” 69 Plaintiff must demonstrate by “a
preponderance of the evidence, a proper purpose entitling [him] to inspection of
every item sought.”70 He must also prove by a preponderance of the evidence that
“each category of books and records is essential to accomplishment of the
[Plaintiff]’s articulate purpose for inspection.” 71 Lastly, “a plaintiff who proves all
of these may be limited in its use of any information where the information is
confidential and release would harm the company.”72
A. Plaintiff’s Purposes A stockholder’s proper purpose is the supreme factor in determining whether
they are entitled to inspection of the corporation’s book and records. 73 Section 220
68 Simeon v. Walt Disney Co., 2023 WL 4208481, at *18 (Del. Ch. June 27, 2023); 8 Del. C. § 220. 69 Disney, 2023 WL 4208481 at *18; 8 Del C. § 220(b). 70 Thomas & Betts Corp. v. Leviton Mfg. Co., Inc., 681 A.2d 1026, 1028 (Del. 1996). 71 Disney at *18; Lebanon Cnty. Emps.’ Ret. Fund v. AmerisourceBergen Corp., 2020 WL 132752, at *6 (Del. Ch. Jan. 13, 2020), aff'd, 243 A.3d 417 (Del. 2020); Thomas & Betts, 681 A.2d at 1035. 72 Pershing Square, L.P. v. Ceridian Corp., 923 A.2d 810, 816 (Del. Ch. 2007); CM & M Grp., Inc. v. Carroll, 453 A.2d 788, 792 (Del. 1982). 73 Ceridian Corp., 923 A.2d at 817; CM & M Grp., 453 A.2d at 792. 16 defines a proper purpose as one “reasonably related to such person's interest as a
stockholder.” 74 Courts have refused to order inspection where “the shareholder is
shown to have possession of all the information that is requested, or where the
request is made out of sheer curiosity, unrelated to any legitimate interest of the
stockholder, or where the sole purpose of the inspection is to harass the
corporation.”75 “It is settled law in Delaware that valuation of one's shares is a
proper purpose for the inspection of corporate books and records. Furthermore, once
a proper purpose is established, any secondary purpose or ulterior motive is
irrelevant.”76
When a corporation denies a demand on the basis that the Plaintiff requested
inspection under “false pretenses”, the corporate defendant bears the burden to prove
it.77 This fact intensive inquiry can be more complex than it appears, and in practice,
“difficult to establish.” 78 Where an alternative purpose exists, a stockholder need
only show that the purpose is secondary to its primary purpose which is indeed
74 8 Del. C. § 220(b). 75 CM & M Grp., 453 A.2d at 792. 76 Woods Trustee of Avery L. Woods Trust v. Sahara Enterprises, Inc., 238 A.3d 879, 892 (Del. Ch. July 22, 2020) (quoting Radwick Pty., Ltd. v. Medical, Inc., 1984 WL 8264, at *1 (Del. Ch. Nov. 7, 1984). 77 Ceridian Corp., 923 A.2d at 817. 78 Id. 17 proper.79 A stockholder will not lose its statutory right of inspection, even if the
secondary purpose is improper for the sake of the statute.80
Here, Plaintiff’s demand seeks inspection of books and records for the
following reasons:
1. To value his interest in the Company; 2. To investigate possible wrongdoing or mismanagement by the Company's officers and directors in connection with certain statements or misstatements in the Company's October 23, 2021 Private Placement Memorandum ("PPM") and/or Business Plan regarding the status of the Company's relationship with MITO Corporation ("MITO"); investigate possible wrongdoing or mismanagement related to the PPM and Business Plan’s representations, director and officer compensation, alleged self- dealing, deviation from the PPM and Business Plan, delay in developing the Power Pack, and to facilitate communications with other stockholders. 3. To investigate possible wrongdoing or mismanagement by the Company's officers and directors in connection with the removal of Mr. Stock as a director of the Company; 4. To investigate possible wrongdoing or mismanagement by the Company's officers and directors in connection with self-dealing transactions and the diversion of corporate assets for the payment of, among other things, inflated salaries and compensation to Company officers and employees; 5. To investigate possible wrongdoing or mismanagement by the Company's officers and directors in connection with the Company's communications, and lack of communications, with existing and potential investors; 6. To investigate possible wrongdoing or mismanagement by the Company's officers and directors in connection with the Company's divergence from its business plan as described in the PPM;
79 Id. 80 Id. (citing Sutherland v. Dardanelle Timber Co., 2006 WL 1451531, at *8 (Del.Ch.) 18 7. To investigate possible wrongdoing or mismanagement by the Company's officers and directors in connection with the Company's potential impending breach of its Exclusive Distribution and Business Collaboration Agreement with Dongguan City Gonghe Electronics Co. Ltd. ("Gonghe Electronics"); 8. To investigate possible wrongdoing or mismanagement by the Company's officers and directors in connection with the delay and failure to complete development of its alternative energy Power Packs and other key products; and 9. To facilitate communications with other stockholders concerning the matters identified in paragraphs 1 through 8 above.81
“Delaware law does not require that a stockholder establish both a purpose for
seeking an inspection and an end to which the fruits of the inspection will be put.”82
However, if a stockholder does say what he will do with it, “then a court can take
those uses into account.”83 Here, the Plaintiff has identified their purposes and what
they plan to do, so I will consider their use where appropriate.
Although the Plaintiff identified nine purposes in his demand, the purposes
can be curtailed to identify three separate primary purposes for his request. First, he
seeks to value his shares in SETI. Second, Plaintiff seeks to investigate possible
wrongdoing and mismanagement. Finally, Plaintiff wishes to communicate with
other shareholders.
81 JX 208. 82 Sahara Enterprises, Inc., 238 A.3d at 891. 83 Amerisourcebergen, 2020 WL 132752, at *13. 19 1. Valuing Shares
Plaintiff has proven by a preponderance of the evidence that he seeks to value
his shares in SETI. According to Plaintiff, his “number one” reason for seeking to
inspect books are records was because he had “a lot of money in [SETI]” as its
“founding investor.”84 Additionally, Plaintiff was concerned about the rapid
increase in share value. 85 That is, Plaintiff – an initial investor at fifty cents per
share—was troubled that the share price increased to $5.00 per share within a year.86
SETI does not refute that Plaintiff’s purposes are proper, but rather, they argue
that “Plaintiff’s stated purposes are pretextual.”87 They contend that where Plaintiff
seeks to investigate misleading statements in the PPM and Business Plan regarding
SETI’s relationship with MITO, his actual purpose is to seek revenge on SETI for
not memorializing an exclusive distribution agreement. 88
84 Tr. 143:16-22. 85 Tr. 143:19-21. 86 Tr. 143:19-21 (“And that’s highly unusual, especially when you have a company that’s not producing any products, selling any products, and getting any revenue”); Tr. 231:9- 14(“…and you go from $1 to $5 within a year, it’s hard for me to get my head around that.”). 87 DOB at 19. 88 Id. 20 SETI argues that Plaintiff’s true purpose is to seek information regarding
SETI refusing to enter into an exclusive distribution agreement with MITO.89 But
Plaintiff credibly conceded at trial that he was not interested in pursuing an exclusive
distribution agreement any longer. 90 It follows, then, that if Plaintiff’s company is
not partnering with SETI in any more formal way, and he is no longer a member of
their board, that his remaining interest in the company relates to his role as a
stockholder. Accordingly, the Company has not proven that Plaintiff’s valuation
purpose is not his primary purpose and Plaintiff is therefore entitled to books and
records essential to valuing his shares in SETI.
2. Investigating wrongdoing “It is well established that a stockholder’s desire to investigate wrongdoing or
mismanagement is a ‘proper purpose.’”91 Plaintiff “cannot satisfy this burden
merely by expressing a suspicion of wrongdoing or a disagreement with a business
decision.”92 Rather, "[t]o protect the corporation from indiscriminate fishing
expeditions and from demands grounded in nothing more than curiosity, [a] mere
statement of a purpose to investigate possible general mismanagement, without
89 DOB at 26-27. 90 See Tr. 170:2-4; 229:6-12. 91 Seinfeld v. Verizon Comm., Inc., 909 A.2d 117, 121 (Del. 2006). 92 Disney, 2023 WL 4208481 at n.128. 21 more, will not entitle a shareholder to broad § 220 inspection relief.”93 However,
“[a] stockholder is “not required to prove by a preponderance of the evidence that
waste and [mis]management are actually occurring. Stockholders need only show,
by a preponderance of the evidence, a credible basis from which the Court of
Chancery can infer there is possible mismanagement that would warrant further
investigation.”94 That burden may be established through “documents, logic,
testimony or otherwise, that there are legitimate issues of wrongdoing.”95
Delaware caselaw is instructive when determining what constitutes some
credible evidence for the standard. In Deephaven Risk Arb Trading Ltd. v.
UnitedGlobalCom, Inc. the company released inconsistent press releases which
appeared to contain false or misleading information, in conjunction with additional
circumstances, Vice Chancellor Parsons found the press releases sufficient to “infer
that wrongdoing may have occurred.”96 Additionally, in Marmon v. Arbinet-
Thexchange, Inc., the stockholder received information of “pervasive
mismanagement” from a member of the board. 97 Unable to offer the testimony by
93 Amerisourcebergen, 2020 WL 132752, at *8 (internal quotation marks omitted). 94 Verizon, 909 A.2d at 123 (internal quotation marks omitted). 95 Id. 96 2005 WL 1713067, (Del. Ch.). 97 2004 WL 936512, at *2 (Del. Ch.). 22 the source of his information at trial, the stockholder avoided violating the rule
against hearsay by not offering the information as proof of the matters asserted, but
instead as credible evidence to support a finding that issues of mismanagement were
present within the company.98
Plaintiff claims potential mismanagement at SETI can be linked to Power
Pack’s lack of development, divergence from and misrepresentations in the PPM
and Business Plan, communications (or lack thereof) with potential investors, self-
dealing transactions, significant raises in share prices, and unreasonable
compensation packages paid to board members as evidence of wrongdoing.99 SETI
responds by attacking Plaintiff’s ability to prove the compensation increases were
invalid—Plaintiff’s failure to provide expert testimony on the subject.
SETI, like many start-ups, utterly failed to achieve the revenue it originally
projected in 2022. 100 But SETI’s projections were based on commitments from
customers who relied on their advertised business plan and PPM—plans they
ultimately abandoned. 101 Although Plaintiff admitted at trial that SETI never used
98 Id. at *4. 99 Compl. ⁋⁋ 9-29. 100 Compl. at ⁋ 24. 101 Under its “Go to Market Strategy” section, SETI’s business plan states: “SETI has a sales & distribution agreement with MITO, Inc…MITO has a national dealer distribution
23 the word “exclusive, ” Plaintiff’s contention that diversion from the plans—absent
adequate explanation from the company—is enough to wonder what happened. 102
Plaintiff also suspects wrongdoing due to self-dealing transactions. At trial,
both Lyons and Plaintiff testified that while the company was actively seeking
funding to meet certain funding goals, Sanders sold his personal shares to them
explaining that he was experiencing personal money issues.103 In December of 2020,
Stock made his initial investment of $500,000 for 1 million shares at $0.50 per
share. 104 Between then and January 25, 2021, Stock purchased an additional 100,000
shares at the increased price of $1 per share from Sanders, personally, stating that
Sanders told Stock it would “really help [him] out.” 105 Stock then purchased an
additional 1 million shares directly from the Company at $0.50 per share for
network that services two beachhead markets targeted by SETI…MITO will service the $4.7B battery replacement market through its national distribution network.” JX 50 at 20; The PPM identifies MITO as a “Sales and Distribution Partner.” JX 51 at 12; Potential investors were given the business plan and PPM as a part of SETI’s presentation; Tr. 124:15-19; Distribution was an important consideration relative to the success of the company; Tr. 28:17-Tr. 29; Although Plaintiff’s briefing focuses on SETI’s refusal to adhere to his suggestion and expertise, I am in no way questioning the complicated business decisions of the managers of the Company. 102 See Tr. 124-125; 144; Tr. 160-161; See generally Tr. 44-46. 103 Tr. 15:1-24; Tr. 16:1-17; Tr. 113:15-24; Tr. 114:1-5; JX 14. 104 JX 3. 105 Tr. 13:15-24; Tr. 14:1-5; JX 14. 24 $500,000 on January 27, 2021 106 —in at a total of $1.1 million. Subsequently in
July or August of 2021, Lyons also purchased stock directly from Sanders. 107 Lyons
purchased 100,000 shares, at yet-another increased price of $2.50 per share, paying
Sanders personally $250,000. 108
Board compensation is another reason Plaintiff suspects mismanagement or
wrongdoing. SETI’s board continued to express concerns about compensation.109
Lyons testified that board compensation was also a concern for him. 110 He thought
that the compensated board members should be taking less compensation to show
investors of their commitment and instead be incentivized by their own
investment.111 He was “frustrated that the first thing [they] did [was] go and try and
pay people more”112 “[E]ven though [they] raised the minimum amount of the
106 JX 15. 107 Tr. 16:10-15. 108 Tr. 16:10-15. 109 Tr. 145:7-13. 110 Tr. 27:13-20 (I was a little -- I was a lot taken aback at the option table. Right before I invested, it looked like the company had authorized I think a $10 million option pool and then immediately granted the bulk of those options, probably 8 million option shares, mostly to insiders, to themselves, to the folks that were there. And I was surprised at that. I didn't understand why you would do that.). 111 Tr.31: 15-24; Tr. 32:1-4.; Tr. 54:4-21. 112 Tr. 54:15-16. 25 round,”113 he didn’t think the Company was “swimming in free cash.” 114 Although
the board followed the recommendations of the compensation committee, mostly
interested board members voted for the salary increases—Fred Solomon, Chris
Sanders, and Bill Harrington.115 The Company argues that Plaintiff provided no
expert evidence to refute the compensation committee’s figures which were based
on comparable salaries. 116
Given the state of the company, I find that Plaintiff has shown, by a
preponderance of the evidence, a credible basis from which to suspect wrongdoing
and mismanagement. The constant raise in stock prices, the increases in salary
despite any forward progress in production or sales, the self-dealing transactions
with the CEO, and the deviations from the original business and marketing plans
without suggesting viable alternatives, together, logically meet the very minimal
credible basis standard required to survive for suspicion of wrongdoing and
mismanagement.
113 Tr. 54:12-13. 114 Tr. 54:14. 115 JX 110. Chris Sanders received an increase of $40,000 immediately and then an additional $100,000 with additional capital raises overtime. Fred Solomon was adjusted down $50,000 from $150,000. The committee recognized that he should have received an increase of $50,000 from $150k to $200k, but because he decreased his work hours by 50%, he received an adjusted salary of $100,000, in consideration of the increase. Bill Harrington’s salary was not adjusted. JX 69. 116 JX 72. 26 3. Communicating with Stockholders
A section 220 complaint seeking a stockholder list for communication with
other stockholders is rarely denied. 117 And communication with other stockholders
about specific matters of corporate concern, has consistently been held to be a proper
purpose for a stockholder to obtain a stock list. 118 It is a sufficient defense of a
corporation to show that a stockholder list was sought for idle curiosity.” 119 Here,
Plaintiff describes what he wants to share with other stockholders: information about
potential mismanagement and wrongdoing. Accordingly, I am convinced the
request is not idle, rather it is a proper purpose.
B. The Scope of the Inspection
Plaintiff has established a proper purpose under Section 220. Thus, I
must determine “the scope of inspection” related to that purpose, which “is a fact
specific inquiry” granting “the court [] broad discretion when conducting it.”120
Plaintiff “bears the burden of proving that each category of books and records is
Polygon Glob. Opportunities Master Fund v. W. Corp., 2006 WL 2947486, at *6 (Del. 117
Ch. Oct. 12, 2006). Conservative Caucus Rsch., Analysis & Educ. Found., Inc. v. Chevron Corp., 525 A.2d 118
569, 571 (Del. Ch. 1987). 119 Sec. First Corp. v. U.S. Die Casting & Dev. Co., 687 A.2d 563,570 (Del. 1997). 120 Myers v. Academy Sec., Inc., 2023 WL 4782948, at *14 (Del. Ch. July 27, 2023) (quoting Hightower v. SharpSpring, Inc., 2022 WL 3970155, at *8 (Del. Ch. Aug. 31, 2022). 27 essential to accomplishment of the stockholder's articulated purpose for the
inspection.”121
When tailoring the production order, the court must balance the interests of
the stockholder and the corporation.122 “[W]here a § 220 claim is based on alleged
corporate wrongdoing, and assuming the allegation is meritorious, the stockholder
should be given enough information to effectively address the problem, either
through derivative litigation or through direct contact with the corporation's directors
and/or stockholders.”123
When determining the necessary and essential documents, courts have
grouped requests into three categories:
• “Formal Board Materials,” or “board-level documents that formally
evidence the directors’ deliberations and decisions and comprise the materials
that the directors formally received and considered”;
• “Informal Board Materials,” which “generally will include communications
between directors and the corporation's officers and senior employees, such
as information distributed to the directors outside of formal channels, in
121 KT4 Partners LLC v. Palantir Techs. Inc., 203 A.3d 738, 751 (Del. 2019). 122 Amerisourcebergen, 2020 WL 132752, at *24 (citing Sec. First, 687 A.2d at 569). 123 Id.
28 between formal meetings, or in connection with other types of board
gatherings”; and
• “Officer-Level Materials,” which are “communications and materials that
were only shared among or reviewed by officers and employees.” 124
Most often, 220 demands only require Formal Board Materials, but should it
prove necessary, an inspection may extend all the way to officer-level materials.125
Plaintiff’s argue that the scope of demand should extend to all-levels of documents,
including informal documents such as emails because SETI failed to follow
corporate formalities.126 SETI argues that Plaintiff waived this request for certain
categories of documents by shifting the scope of the documents requested in the pre-
trial brief and at trial and that Plaintiff’s request seeks information already in his
possession. 127 I disagree.
1. Informal Materials
Plaintiff cites KT4 Partners LLC v. Palantir Techs. Inc., as a basis for his
request for the Company to include additional categories of documents, including
124 Hightower, 2022 WL 3970155, at *9. 125 Amerisourcebergen Corp., 2020 WL 132752, at *24. 126 Op. Br. At 32-34. 127 Defs. POB at 2. 29 emails.128 They argue that Palantir and its progeny require the production of emails
where there is a meritorious showing that a Company frequently utilized less-formal
methods of communication to conduct its business. 129 Under this theory, they assert
that the Company only sporadically formalized board actions.130 Plaintiff offers trial
testimony from Lyons who said that Board meetings were “loosely arranged,”131
Tara Brown’s deposition testimony where she admits that SETI possessed the
materials to function formally but still communicated through personal emails and
sent corporate documents that way. 132 Lastly, Plaintiff offers that the nature of the
suspected mismanagement and wrongdoing require the company’s informal
communications. 133
Defendant asserts that under Palantir, companies who perform traditional
business formalities should only need to produce those records and as such, Plaintiff
must show a specific need for additional materials.134 The Company furthers their
argument by highlighting the many ways SETI observes corporate formalities. SETI
128 PPB at 5. 129 Id. at 4-7. 130 PPB at 7. 131 PPB at 7; Tr. 17:5. 132 PPB at 9. 133 PPB at 10. 134 DPB at 11. 30 says it held “nearly” monthly board meetings, “prepares and maintains agendas,
minutes, resolutions, and written consents.” 135 SETI notes that it has the necessary
positions in place to conduct corporate formalities, such as a Chief Financial Officer,
Corporate Secretary, and Treasurer. SETI even employs a third party, Clear Trust,
to maintain its corporate records and Quickbooks, for its financial statements.136
Defendant also asserts that Plaintiff “failed to present evidence” that SETI conducts
business without board formalities.137
A stockholder may seek the tools to pursue a claim against the company under
section 220. The Delaware Supreme Court has at least inferred that the statue
permits inspection for this purpose but does so without permitting disruption of the
corporations' operations and decision-making. 138 Therefore, Stock’s request must
strike a balance between the two. Stock’s purposes require email’s due to the nature
of the wrongdoing. Several of the emails submitted to the court involved
compensation arrangements, board proposals, conversations around the business
plan, PPM, and distribution strategy. It follows then, that wrongdoing in these areas
is less likely to be evinced through the company’s corporate records if much of that
135 DPB at 12. 136 DPB at 13. 137 DPB at 16. 138 See Verizon, 909 A.2d at 121. 31 discussion occurred informally. While SETI certainly conducted formal board
meetings, Lyons credibly testified that much of the questionable decisions occurred
outside of those formal meetings.139 Certainly, Sanders did not offer his private
shares to Lyons and Stock in ear shot of the secretary for recording in the board’s
minutes. 140 Accordingly, to give Plaintiff the ability to achieve section 220’s
purpose, I must recommend that SETI disclose its emails.
2. Unnecessary Documents
In Plaintiff’s opening brief, Plaintiff asserts that all the documents requested
are necessary and essential.141 Plaintiff also asks for a wide range of documents
because the Company lacked formalities. 142 For each set of Plaintiff’s requested
“documents and communications” related to each proper purpose, Defendant claims
that Plaintiffs have certain documents in their possession. Namely, document set
number two “[t]he Company’s articles of incorporation and bylaws, including any
amendments thereto;” Defendant’s point out that those documents were submitted
as joint exhibit. Unless there are any unknown amendments, documents set two is
not necessary nor essential.
139 Tr 17:5-14. 140 Tr 16:1-7; Tr. 113:15-24. 141 POB at 36. 142 POB at 34. 32 Document set six requests documents and communication relating to MITO
serving as distributor. Because Plaintiff admitted that he no longer desires to be in
contract with SETI, they are unnecessary. Likewise, document set ten is
unnecessary as it requests communications with potential investors. I find the
communications with potential investors are unnecessary as their interest in the
investigation of wrongdoing and understanding of the company is speculative since
potential investors lack a relevant interest in the Company.
IV. CONCLUSION
For the foregoing reasons I recommend that SETI give Plaintiff all document
sets except numbers two, six, and ten from the Demand. The Plaintiff has established
that the remaining category of books and records requested is essential and sufficient
to its stated purpose.
This is a final report and exceptions may be taken pursuant to Court of
Chancery Rule 144(d)(2). The stay of exceptions entered under the Chancellor’s
May 9, 2023, reassignment letter is hereby lifted.