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February 20, 2013

Limited Inspection of Books and Records Ordered

By Anne Sherry, J.D.

Stockholders of American Cash Exchange, Inc. (ACE) sought access to ACE's books and records for purposes of valuing their stock and investigating possible breaches of fiduciary duty. The court allowed access but limited the scope to those documents related to the allegations of self-dealing (Doerler v. American Cash Exchange, Inc., February 19, 2013, Glasscock, S.).

Background. ACE, a Delaware corporation, holds patents on technology allowing individuals without bank accounts to send cash domestically and internationally. Nevertheless, ACE has brought in virtually no revenue in the last ten years, has suffered significant losses from operations every year since its inception, and has limited working capital and numerous creditors. Despite these problems, ACE's disclosures and projections have been optimistic, including projected growth into 10,000 stores by the end of 2009, profitability in 2010, and "considerable progress with several U.S. chains" as of May 2011. Alleging that inaccuracies in these and other representations form a basis for investigating present mismanagement at the company, the plaintiffs submitted multiple demand letters requesting certain books and records; ACE provided some books and records but withheld its general ledger, business agreements, and accounts receivable and accounts payable records.

Related-party transactions. The plaintiffs also alleged certain self-dealing on the part of company insiders. For example, they alleged that the president and CEO lives rent-free in the personal residence whose ownership he transferred to the company, takes cash out of the company for his personal use, and takes loans from the company. In its defense, the company claimed that one of the plaintiffs, a former CFO of ACE, contacted other stockholders and creditors as part of a scheme to discredit ACE and eventually bring a lawsuit or file an involuntary bankruptcy proceeding against the company.

Proper purpose. The court noted that Delaware law permits a stockholder to inspect books and records of a company for a proper purpose, even if the stockholder has a secondary, ulterior motive. The scope of the inspection is limited to those books and records that are necessary and essential to accomplish the proper purpose; a shareholder must tailor his demands accordingly. The court found that the stockholders' request for all contracts, without limit as to category or value, was overbroad. Similarly, the request for all detailed records supporting the general ledger was overbroad. The court did find that the plaintiffs provided evidence sufficient to form a basis for the inspection of the general ledger, contracts between ACE and any ACE-related party, and other documents concerning related-party transactions.

The case is No. 7640-VCG.

Attorneys: John D. Demmy and Melissa A. Anderson (Stevens & Lee) for William Doerler, Erwin Harbat, Thomas Redman, John Sheridan, and Earl Tindall. Richard L. Abbott (Abbott Law Firm) for American Cash Exchange, Inc.

Companies: American Cash Exchange, Inc.

LitigationEnforcement: CorporateFinance CorporateGovernance DelawareNews FraudManipulation

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