EFiled: Oct 03 2014 01:09PM EDT Transaction ID 56128525 Case No. 9154-VCN COURT OF CHANCERY OF THE STATE OF DELAWARE
JOHN W. NOBLE 417 SOUTH STATE STREET VICE CHANCELLOR DOVER, DELAWARE 19901 TELEPHONE: (302) 739-4397 FACSIMILE: (302) 739-6179
October 3, 2014
Blake A. Bennett, Esquire Gregory V. Varallo, Esquire Cooch and Taylor, P.A. Richards, Layton & Finger, P.A. 1000 West Street, 10th Floor 920 North King Street Wilmington, DE 19801 Wilmington, DE 19801
Re: Wolst v. Monster Beverage Corporation C.A. No. 9154-VCN Date Submitted: June 13, 2014
Dear Counsel:
Plaintiff Anastasia Wolst (“Wolst”) has owned common stock of Defendant
Monster Beverage Corporation (“Monster”) continuously since 1999. During 2006
and 2007, with the benefit of nonpublic information about Monster’s finances and
business prospects, certain insiders allegedly sold Monster common stock. That
conduct resulted in federal securities class litigation filed in September 2008.1 The
1 Am. Pre-Trial Stip. & Order (“Pretrial Stip.”) ¶ 6. Wolst, because of the lack of any trading activities during the pertinent timeframe, was not a member of the class. See Pretrial Stip. ¶ 5. Wolst v. Monster Beverage Corporation C.A. No. 9154-VCN October 3, 2014 Page 2
parties to the federal securities class action entered into a settlement agreement in
April 2014.2
In October 2008, other shareholders brought a derivative action regarding
the trading activities. Wolst eventually joined in that effort. Because of an
inability to establish demand futility, the derivative action failed.
Disappointed with that outcome, Wolst, in February 2012, made a demand
on Monster’s board of directors to bring litigation related to the alleged insider
trading of 2006 and 2007. In response to her demand, Monster’s board appointed a
Special Committee. As a result of the Special Committee’s investigation, her
demand for litigation was rejected. The Special Committee did not provide a
written report, and Wolst did not abandon her concerns about those trading
activities.
In March 2013, Wolst sent a letter to Monster seeking to inspect certain of
its books and records in accordance with 8 Del. C. § 220.3 She identified her
purposes for inspection as: (1) “[e]valuating the Board’s refusal to act on [her]
2 Monster’s insurers committed to pay the $16,250,000 settlement. JX 52; Pretrial Stip. ¶ 14. 3 JX 44; Pretrial Stip. ¶ 56. Wolst v. Monster Beverage Corporation C.A. No. 9154-VCN October 3, 2014 Page 3
litigation demand and whether that refusal constituted a reasonable and good-faith
exercise of the Board’s business judgment” and (2) “[e]valuating the process by
which the Board decided to refuse to act on [her] litigation demand.”4 Wolst
concedes that her ultimate goal in pursuing her books and records request is “to
determine whether there is a basis to bring a derivative suit” based on the “wrongs
alleged in” the earlier derivative action.5 Thus, the “end game” here for Wolst is
the filing of another derivative action. Wolst has not offered any other purpose,
and no other purpose is apparent.
This matter was tried on a paper record, and this letter opinion sets forth the
Court’s findings of fact (essentially uncontested) and its conclusions of law
(vigorously debated).
A stockholder invoking her rights under Section 220 must demonstrate a
“proper purpose” for the inspection. A proper purpose is one “reasonably related
to [the stockholder’s] interest as a stockholder.”6 Monster argues that Wolst does
not have a proper purpose because the derivative claims that she wants to bring
4 JX 44; Pretrial Stip. ¶ 58. 5 JX 59 at 109, 119; Pretrial Stip. ¶ 58. 6 8 Del. C. § 220(b). Wolst v. Monster Beverage Corporation C.A. No. 9154-VCN October 3, 2014 Page 4
would be time-barred.7 Wolst seeks to assess whether the Special Committee’s
investigation was wrongful or improper in order to develop a basis for avoiding the
consequences of Monster’s rejection of her demand that litigation be brought to
remedy the trading activities. Her purpose is to advance her derivative claims,
which would be a proper purpose unless the time-bar defense defeats it.
A potentially viable affirmative defense to an anticipated derivative claim
will not necessarily defeat a books and records effort.8 Sometimes developing the
record to withstand possible affirmative defenses requires more effort than is
practicable for a books and records action. Sometimes conduct that cannot be
challenged because of a time-bar defense can, nevertheless, inform consideration
of other potentially wrongful conduct that is not yet time-barred. There is,
however, “the possibility that, in a specific factual setting, a time bar defense . . .
would eviscerate any showing that might otherwise be made in an effort to
establish a proper shareholder purpose.”9 The challenged trading activities
7 Monster does not dispute that her purpose would be proper if the eventual derivative claims could be filed timely. 8 See, e.g., Amalgamated Bank v. UICI, 2005 WL 1377432, at *2 (Del. Ch. June 2, 2005). 9 Id. at *2 n.14. Wolst v. Monster Beverage Corporation C.A. No. 9154-VCN October 3, 2014 Page 5
occurred in 2006 and 2007. Wolst does not identify any more recent potentially
wrongful conduct that could provide a basis for a derivative action. Without some
elaboration upon what she would do with the requested books and records in her
capacity as a stockholder, the burden of producing books and records that
Section 220 imposes upon the corporation should be avoided in this instance. In
sum, consideration of a time-bar defense to the contemplated derivative action is
appropriate in this “specific factual setting.”10
The last of the events serving as the basis for Wolst’s anticipated derivative
action occurred almost seven years ago, well beyond the presumptive three-year
limit of 10 Del. C. § 8106, the analogous statute of limitations. Although equity is
not strictly bound to a statute of limitations in this context, the three-year period is
a start in the Court’s laches analysis. Wolst argues that Monster has failed to
satisfy the laches requirements of both unreasonable delay and prejudice.11
However, delay of seven years is unreasonable, especially since Wolst had
constructive knowledge of the events by late 2007 and participated in a related
10 See Graulich v. Dell Inc., 2011 WL 1843813, at *6 (Del. Ch. May 16, 2011). 11 See, e.g., Roseton OL, LLC v. Dynegy Hldgs., Inc., 2011 WL 3275965, at *7 (Del. Ch. July 29, 2011). Wolst v. Monster Beverage Corporation C.A. No. 9154-VCN October 3, 2014 Page 6
derivative action. Although Monster has not itemized how it would be prejudiced,
delay for which Wolst is responsible is presumptively prejudicial under the
circumstances because of fading memories and the protracted distractions diverting
management’s attention from the needs of the corporation. The passage of seven
years from events which were the subject of other timely litigation would
unjustifiably prejudice Monster.12
Thus, Wolst’s derivative claims would be time-barred unless the pendency
of the federal securities class action is a basis for tolling the statute of limitations
and the period for evaluating the laches defense. Wolst relies upon the principle
that the filing of a class action generally tolls the running of the statute of
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EFiled: Oct 03 2014 01:09PM EDT Transaction ID 56128525 Case No. 9154-VCN COURT OF CHANCERY OF THE STATE OF DELAWARE
JOHN W. NOBLE 417 SOUTH STATE STREET VICE CHANCELLOR DOVER, DELAWARE 19901 TELEPHONE: (302) 739-4397 FACSIMILE: (302) 739-6179
October 3, 2014
Blake A. Bennett, Esquire Gregory V. Varallo, Esquire Cooch and Taylor, P.A. Richards, Layton & Finger, P.A. 1000 West Street, 10th Floor 920 North King Street Wilmington, DE 19801 Wilmington, DE 19801
Re: Wolst v. Monster Beverage Corporation C.A. No. 9154-VCN Date Submitted: June 13, 2014
Dear Counsel:
Plaintiff Anastasia Wolst (“Wolst”) has owned common stock of Defendant
Monster Beverage Corporation (“Monster”) continuously since 1999. During 2006
and 2007, with the benefit of nonpublic information about Monster’s finances and
business prospects, certain insiders allegedly sold Monster common stock. That
conduct resulted in federal securities class litigation filed in September 2008.1 The
1 Am. Pre-Trial Stip. & Order (“Pretrial Stip.”) ¶ 6. Wolst, because of the lack of any trading activities during the pertinent timeframe, was not a member of the class. See Pretrial Stip. ¶ 5. Wolst v. Monster Beverage Corporation C.A. No. 9154-VCN October 3, 2014 Page 2
parties to the federal securities class action entered into a settlement agreement in
April 2014.2
In October 2008, other shareholders brought a derivative action regarding
the trading activities. Wolst eventually joined in that effort. Because of an
inability to establish demand futility, the derivative action failed.
Disappointed with that outcome, Wolst, in February 2012, made a demand
on Monster’s board of directors to bring litigation related to the alleged insider
trading of 2006 and 2007. In response to her demand, Monster’s board appointed a
Special Committee. As a result of the Special Committee’s investigation, her
demand for litigation was rejected. The Special Committee did not provide a
written report, and Wolst did not abandon her concerns about those trading
activities.
In March 2013, Wolst sent a letter to Monster seeking to inspect certain of
its books and records in accordance with 8 Del. C. § 220.3 She identified her
purposes for inspection as: (1) “[e]valuating the Board’s refusal to act on [her]
2 Monster’s insurers committed to pay the $16,250,000 settlement. JX 52; Pretrial Stip. ¶ 14. 3 JX 44; Pretrial Stip. ¶ 56. Wolst v. Monster Beverage Corporation C.A. No. 9154-VCN October 3, 2014 Page 3
litigation demand and whether that refusal constituted a reasonable and good-faith
exercise of the Board’s business judgment” and (2) “[e]valuating the process by
which the Board decided to refuse to act on [her] litigation demand.”4 Wolst
concedes that her ultimate goal in pursuing her books and records request is “to
determine whether there is a basis to bring a derivative suit” based on the “wrongs
alleged in” the earlier derivative action.5 Thus, the “end game” here for Wolst is
the filing of another derivative action. Wolst has not offered any other purpose,
and no other purpose is apparent.
This matter was tried on a paper record, and this letter opinion sets forth the
Court’s findings of fact (essentially uncontested) and its conclusions of law
(vigorously debated).
A stockholder invoking her rights under Section 220 must demonstrate a
“proper purpose” for the inspection. A proper purpose is one “reasonably related
to [the stockholder’s] interest as a stockholder.”6 Monster argues that Wolst does
not have a proper purpose because the derivative claims that she wants to bring
4 JX 44; Pretrial Stip. ¶ 58. 5 JX 59 at 109, 119; Pretrial Stip. ¶ 58. 6 8 Del. C. § 220(b). Wolst v. Monster Beverage Corporation C.A. No. 9154-VCN October 3, 2014 Page 4
would be time-barred.7 Wolst seeks to assess whether the Special Committee’s
investigation was wrongful or improper in order to develop a basis for avoiding the
consequences of Monster’s rejection of her demand that litigation be brought to
remedy the trading activities. Her purpose is to advance her derivative claims,
which would be a proper purpose unless the time-bar defense defeats it.
A potentially viable affirmative defense to an anticipated derivative claim
will not necessarily defeat a books and records effort.8 Sometimes developing the
record to withstand possible affirmative defenses requires more effort than is
practicable for a books and records action. Sometimes conduct that cannot be
challenged because of a time-bar defense can, nevertheless, inform consideration
of other potentially wrongful conduct that is not yet time-barred. There is,
however, “the possibility that, in a specific factual setting, a time bar defense . . .
would eviscerate any showing that might otherwise be made in an effort to
establish a proper shareholder purpose.”9 The challenged trading activities
7 Monster does not dispute that her purpose would be proper if the eventual derivative claims could be filed timely. 8 See, e.g., Amalgamated Bank v. UICI, 2005 WL 1377432, at *2 (Del. Ch. June 2, 2005). 9 Id. at *2 n.14. Wolst v. Monster Beverage Corporation C.A. No. 9154-VCN October 3, 2014 Page 5
occurred in 2006 and 2007. Wolst does not identify any more recent potentially
wrongful conduct that could provide a basis for a derivative action. Without some
elaboration upon what she would do with the requested books and records in her
capacity as a stockholder, the burden of producing books and records that
Section 220 imposes upon the corporation should be avoided in this instance. In
sum, consideration of a time-bar defense to the contemplated derivative action is
appropriate in this “specific factual setting.”10
The last of the events serving as the basis for Wolst’s anticipated derivative
action occurred almost seven years ago, well beyond the presumptive three-year
limit of 10 Del. C. § 8106, the analogous statute of limitations. Although equity is
not strictly bound to a statute of limitations in this context, the three-year period is
a start in the Court’s laches analysis. Wolst argues that Monster has failed to
satisfy the laches requirements of both unreasonable delay and prejudice.11
However, delay of seven years is unreasonable, especially since Wolst had
constructive knowledge of the events by late 2007 and participated in a related
10 See Graulich v. Dell Inc., 2011 WL 1843813, at *6 (Del. Ch. May 16, 2011). 11 See, e.g., Roseton OL, LLC v. Dynegy Hldgs., Inc., 2011 WL 3275965, at *7 (Del. Ch. July 29, 2011). Wolst v. Monster Beverage Corporation C.A. No. 9154-VCN October 3, 2014 Page 6
derivative action. Although Monster has not itemized how it would be prejudiced,
delay for which Wolst is responsible is presumptively prejudicial under the
circumstances because of fading memories and the protracted distractions diverting
management’s attention from the needs of the corporation. The passage of seven
years from events which were the subject of other timely litigation would
unjustifiably prejudice Monster.12
Thus, Wolst’s derivative claims would be time-barred unless the pendency
of the federal securities class action is a basis for tolling the statute of limitations
and the period for evaluating the laches defense. Wolst relies upon the principle
that the filing of a class action generally tolls the running of the statute of
limitations for all potential class members.13 In the class action structure, the
putative class representatives who file the action do so not only for themselves, but
also for all similarly situated persons. Those similarly situated persons are entitled
to rely upon the actions of their putative representatives. Otherwise, potential class
12 Even if it is assumed that the period during which Wolst has attempted to exercise her rights under Section 220 may be excluded from the Court’s time-bar arithmetic, the relevant period still exceeds five years, more than enough time for her to have exercised any right to bring a derivative action. 13 See Am. Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974); Dubroff v. Wren Hldgs., LLC, 2011 WL 5137175 (Del. Ch. Oct. 28, 2011). Wolst v. Monster Beverage Corporation C.A. No. 9154-VCN October 3, 2014 Page 7
members would be under pressure to file their own actions in order to avoid having
their individual claims time-barred in the event that the initial class representatives
decide to abandon their efforts. It does not appear that the class action concept of
tolling has been extended to derivative actions.14 It is true, as Wolst points out,
that derivative actions purportedly brought to recover a corporation’s losses from
violations of federal securities laws and the resulting litigation are frequently
stayed pending resolution of the foundational securities litigation. Until the
outcome of the securities litigation is known, the scope of the harm suffered by the
corporation is uncertain. Yet just because prudent case management may support a
stay of a derivative action in a similar context, it does not follow that the statute of
limitations ceases to run for every interested party. More specifically, the class
action tolling doctrine has only been applied for the benefit of potential class
members. Wolst was not a member of the class in the federal securities litigation
and thus is not entitled to the benefits accruing to the class. In short, the Court
declines to extend the rationale of American Pipe, which protects stockholders’
14 Cf. Krinsk v. Fund Asset Mgmt., Inc., 1986 WL 205, at *3 (S.D.N.Y. May 9, 1986). Wolst v. Monster Beverage Corporation C.A. No. 9154-VCN October 3, 2014 Page 8
direct claims, to derivative claims that stockholders might assert on behalf of the
corporation.
In summary, Wolst “has articulated no stated purpose other than to
investigate wrongdoing in order to bring [her derivative] suit against [Monster’s
insiders who traded on nonpublic information], and [Wolst] is time-barred from
bringing that suit.”15 Accordingly, because the derivative action contemplated by
Wolst would be time-barred and because no other purpose has been identified, she
has failed to prove a proper purpose, an essential element of her case under 8 Del.
C. § 220. Judgment is entered in favor of Monster.16
IT IS SO ORDERED.
Very truly yours,
/s/ John W. Noble
JWN/cap cc: Register in Chancery-K
15 Graulich, 2011 WL 1843813, at *6. 16 The parties shall bear their own costs. Wolst had a proper purpose, but for the time-bar aspect of her action. Whether the American Pipe doctrine should be extended in these circumstances was a question not free of doubt.