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Henry v. Phixios Holdings, Inc. - No. 12504-VCMR, 2017 Del. Ch. LEXIS 119 (Ch. July 10, 2017)

Rule:

The "credible basis" standard for purposes of inferring mismanagement or wrongdoing sets the lowest possible burden of proof. To state a credible basis to support investigation of possible mismanagement, the stockholder must show "some evidence" from which the Court of Chancery can infer there is possible mismanagement that would warrant further investigation. This threshold may be satisfied by a credible showing, through documents, logic, testimony, or otherwise, that there are legitimate issues of wrongdoing.

Facts:

Plaintiff Jon Henry, who alleged that he was a stockholder, sought the books and records for the purpose of investigating mismanagement of defendant Phixios Holdings, Inc., communicating with other stockholders, and valuing his shares. Henry points to the chief operating officer's own in-court admissions of using corporate funds for personal expenses and Phixios's precarious financial situation as a credible basis to infer mismanagement sufficient to establish a proper purpose under Del. Code Ann. tit. 8, § 220. Phixios has rebuffed all examination efforts because it alleges that Plaintiff Henry is no longer a stockholder. According to Phixios, its initial three directors adopted bylaws that contain stock transfer restrictions, and all company stock certificates that were issued after that time were subject to those restrictions. Plaintiff Henry responds that he did not have actual knowledge of the stock transfer restrictions before he acquired the stock and never assented to the restrictions after he acquired the stock, which is required under Del. Code Ann. tit. 8, § 202

Issue:

(a) Was the stockholder's shares subject to restrictions? (b) Did the stockholder have the right to inspect the company’s book and records?

Answer:

(a) No (b) Yes

Conclusion:

Defendant Phixios invalidly revoked plaintiff Henry's stock because Phixios could not rebut the stockholder's testimony that Henry did not have actual knowledge of the transfer restrictions prior to acquiring the stock, and Henry did not assent to be bound by the stock transfer restrictions contained in the Stockholder Agreement, Del. Code Ann. tit. 8, § 202. Further, Henry was entitled to inspect Phixios' books and records, Del. Code Ann. tit. 8, § 220, because, inter alia, the chief operating officer's in-court admissions of using corporate funds for personal expenses and the company's precarious financial situation were a credible basis to infer mismanagement sufficient to establish a proper purpose.

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