February 3, 2025
Books & Records: Post-Demand Media Reports Can Support a Proper Purpose
Two days after the Wall Street Journal reported that Paramount Global was in exclusive discussions with Skydance regarding its potential acquisition of Paramount’s controlling stockholder, National Amusements (NAI), or NAI’s controlling stake in Paramount rather than a transaction with Paramount itself, the Employees’ Retirement System of Rhode Island, a Paramount stockholder, served the company with a books and records demand. The demand sought the production of materials related to a transaction involving NAI, Paramount, or its assets, any board committee evaluating any such transaction, and any change-in-control agreements with company management — including emails and texts.
The company rejected the demand, arguing that it lacked a proper purpose — as it hadn’t identified “a theoretically viable form of wrongdoing” — and failed to identify sufficient evidence to support a credible basis to suspect wrongdoing. Litigation ensued. The Delaware Chancery Court posted its opinion last week in State of Rhode Island Office of the General Treasurer v. Paramount Global (Del. Ch.; 1/25).
Citing the demand’s reference to “usurping Paramount’s corporate opportunities,” Paramount argued that whenever a controlling stockholder could veto a potential transaction, there’s no “corporate opportunity” that the controlling stockholder could usurp. Vice Chancellor Laster notes this is a “valid point” but that the demand does not need to articulate a specific legal theory. He found that Paramount sought to “put the cart before the horse” by insisting that the demand articulate a conceptually viable legal theory — a demand must “explain why the stockholder has a credible basis to suspect wrongdoing,” and a controlling stockholder “steering bidders away from a company-level transaction and toward a parent-level transaction” can involve breaches of the duty of loyalty.
With respect to the stockholder’s evidentiary burden, the opinion notes that it must only show that there is a credible basis from which the court can infer a possibility of wrongdoing by a preponderance of the evidence — not to prove that wrongdoing or mismanagement is actually occurring or that wrongdoing is probable.
Paramount argued that the stockholder impermissibly relied on post-demand events to support proper purpose — specifically, the WSJ’s continued reporting on transaction-related developments. While the opinion says, “this decision need not establish rules for all cases,” it allows the plaintiff to rely on post-demand evidence about pre- and post-demand events — noting that the stockholder promptly raised post-demand developments during the litigation and that it would be wasteful to exclude the evidence and require a new demand be served.
VC Laster also disagreed with Paramount’s argument that news articles referenced by plaintiffs were not reliable enough to constitute evidence of the stockholder’s credible basis to suspect wrongdoing — noting that plaintiffs may rely on circumstantial evidence or hearsay for this purpose.
VC Laster found that the stockholder is entitled to the necessary books and records and remanded to the magistrate judge to address the scope of production.
– Meredith Ervine