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In Swift v. Houston Wire & Cable Co., C.A. No. 2021-0525-LWW (Del. Ch. Dec. 3, 2021), the Delaware Court of Chancery recently held that a stockholder lacked standing to initiate a Section 220 books-and-records action once the merger became “effective” under the merger agreement and the stockholder’s shares were canceled, even though the merger had not yet “closed” under the terms of the merger agreement when the action was filed.

Case background

The plaintiff (Plaintiff) in Todd Swift v. Houston Wire & Cable Co., C.A. No. 2021-0525-LWW (Del. Ch. Dec. 3, 2021) was a former stockholder of Houston Wire & Cable Company (Houston Wire). 

On March 24, 2021, Houston Wire entered into a merger agreement with Omni Cable, LLC (Omni) and OCDFH Acquisition Sub (Acquisition Sub). The merger agreement provided that Acquisition Sub would merge with and into Houston Wire, with Houston Wire surviving as a wholly owned subsidiary of Omni, in an all-cash transaction valued at $91 million. The merger agreement specifically provided that the merger would become “effective” when the certificate of merger was filed with the Delaware Secretary of State. At the effective time, each issued and outstanding share of Houston Wire common stock would be canceled and converted into the right to receive merger consideration of $5.30 in cash. The merger agreement also provided that the “closing” of the merger would occur no earlier than the day following the effective date.

On June 7, 2021, Plaintiff served a books-and-records demand on Houston Wire, demanding certain books and records relating to the merger under Section 220 of the Delaware General Corporation Law (the Demand). Houston Wire responded to the Demand on June 14, 2021 and offered to meet and confer with Plaintiff regarding the Demand.

On June 15, 2021, more than 60 percent of Houston Wire stockholders voted in favor of the merger, and Houston Wire filed a certificate of merger with the Delaware Secretary of State at 12.19 p.m. ET that same day. On June 15, 2021, at 3.55 p.m., Plaintiff filed a complaint to compel inspection of books and records under Section 220. On August 31, 2021, Houston Wire moved to dismiss the complaint for lack of standing.

The Court of Chancery’s decision

In its motion to dismiss, Houston Wire argued that (i) Plaintiff ceased to be a stockholder of Houston Wire at the moment the merger certificate was filed, and (ii) Plaintiff did not have standing to file the lawsuit under Section 220 without being a stockholder. Plaintiff advocated that the “closing” of the merger – which would have been 9 a.m. CT on June 16, 2021 – should be the relevant event for purposes of standing. The Court of Chancery agreed with Houston Wire and granted its motion to dismiss.

The Court noted that stockholders of Delaware corporations enjoy a qualified right to inspect a corporation’s books and records under Section 220. Section 220(a) defines a “stockholder” as “a holder of record of stock in a stock corporation, or a person who is the beneficial owner of shares of such stock held either in a voting trust or by a nominee on behalf of such person.”