Saito v. Mckesson Hboc, Inc.

806 A.2d 113 (Del. 2002)

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Nature of the Case

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Facts

On October 17, 1998, McKesson Corporation entered into a stock-for-stock merger agreement with HBO & Company (“HBOC”). On October 20, 1998, Saito (P) purchased McKesson stock. The merger was consummated in January 1999, and the combined company was renamed McKesson HBOC, Incorporated (D). HBOC continued its separate corporate existence as a wholly-owned subsidiary of D. In April and continuing through July 1999, D announced a series of financial restatements triggered by its year-end audit process. D reduced its revenues by $327.4 million for the three prior fiscal years. An avalanche of lawsuits began. P was one of four plaintiffs in the Ash complaint, which alleged that: (i) McKesson’s directors breached their duty of care by failing to discover the HBOC accounting irregularities before the merger; (ii) McKesson’s directors committed corporate waste by entering into the merger with HBOC; (iii) HBOC’s directors breached their fiduciary duties by failing to monitor the company’s compliance with financial reporting requirements prior to the merger; and (iv) D’s directors failed in the same respect during the three months following the merger. The Ash complaint was dismissed but without prejudice as to the pre-merger and post-merger oversight claims. The Court of Chancery specifically suggested that P and the other plaintiffs “use the ‘tools at hand,’ most prominently §220 books and records actions, to obtain information necessary to sue derivatively. P followed that advice. P’s 220 demand was: (1) to further investigate breaches of fiduciary duties by the boards of directors of HBO & Co., Inc., McKesson, Inc., and/or D related to their oversight of their respective company’s accounting procedures and financial reporting; (2) to investigate potential claims against advisors engaged by McKesson, Inc. and HBO & Co., Inc. to the acquisition of HBO & Co., Inc. by McKesson, Inc.; and (3) to gather information relating to the above in order to supplement the complaint in Ash v. McCall. D demanded access to eleven categories of documents, including those relating to Arthur Andersen’s pre-merger review and verification of HBOC’s financial condition; communications between or among HBOC, McKesson, and their investment bankers and accountants concerning HBOC’s accounting practices; and discussions among members of the Boards of Directors of HBOC, McKesson, and or D concerning reports published in April 1997 and thereafter about HBOC’s accounting practices or financial condition. D refused access. The Court of Chancery found that P stated a proper purpose for the inspection of books and records - to ferret out possible wrongdoing in connection with the merger of HBOC and McKesson. The court held that P’s proper purpose only extended to potential wrongdoing after the date on which P acquired his McKesson stock. It also held that P did not have a proper purpose to inspect documents relating to potential claims against third party advisors who counseled the boards in connection with the merger. The court also held that P was not entitled to HBOC documents because he was not a stockholder of pre-merger HBOC, and, with respect to post-merger HBOC, he did not establish a basis on which to disregard the separate existence of the wholly-owned subsidiary. This appeal resulted.