Case Name: Patricia Spain v. Altaba Inc.
Case No.: 18-CV-321765

This is petition for writ of mandate to compel Altaba to produce books and records pursuant to a shareholder inspection demand. Before the Court is Altaba’s demurrer to the petition.

I. Factual and Procedural Background

As alleged in petitioner’s Verified Petition for Writ of Mandate (“Petition”), petitioner made a demand to inspect certain of Altaba’s books and records by letter dated November 21, 2017. (Petition, ¶ 4.) Petitioner’s demand is in furtherance of her attempts to investigate alleged wrongdoing by officers and directors of Yahoo! Inc., Altaba’s predecessor, in connection with data breaches that occurred in 2013 and 2014. (Id. at ¶ 14.) The data breaches preceded the sale of Yahoo!’s operating assets to Verizon Communications Inc. The purchase agreement governing the sale left Altaba responsible for fifty percent of the damages from consumer class action lawsuits arising from the data breaches; all damages from shareholder lawsuits; and any fines and penalties imposed by the Securities and Exchange Commission or the Department of Justice, which have investigated Yahoo!’s response to the breaches. (Id. at ¶¶ 14-15.)

Petitioner previously filed a shareholder derivative action arising from the data breaches, which was consolidated with related actions and is currently pending in this Department. (In re Yahoo! Inc. Shareholder Litigation (Super. Ct. Santa Clara County, No. 17-CV-307054).) On November 2, 2017, the Court sustained Altaba’s demurrer to the consolidated complaint in that action with leave to amend, finding that plaintiffs had failed to plead demand futility as required to proceed with their derivative claims (or to allege any non-derivative claims). The derivative plaintiffs filed their amended complaint on January 2, 2018, and defendants’ demurrers to that complaint are scheduled to be heard on June 22, 2018.

The inspection demand at issue in this Petition encompasses: (1)-(2) all reports and analyses of the 2013 and 2014 data breaches conducted by any third-party consultant or company; (3)-(4) all board and board committee meeting minutes, packages, and materials concerning the data breaches; (5) all board and board committee meeting minutes, packages, and materials concerning the amendment of the purchase agreement with Verizon; and (6) all internal reports and analyses by Yahoo! or Altaba concerning the data breaches. (Petition, ¶ 17.) Following meet and confer, Altaba agreed to search for and produce board and board committee minutes concerning the data breaches and the amendment to the purchase agreement, but had not produced any such records at the time the Petition was filed on January 12, 2018. (Id. at ¶¶ 5-7.)

Petitioner alleges that Altaba must produce the requested documents pursuant to her common law inspection rights and her inspection rights under section 1601 of the Corporations Code. (Petition, ¶ 10.) Section 1601 provides that

[t]he accounting books and records and minutes of proceedings of the shareholders and the board and committees of the board of any domestic corporation, and of any foreign corporation keeping any such records in this state … shall be open to inspection upon the written demand on the corporation of any shareholder …, for a purpose reasonably related to such holder’s interests as a shareholder ….

(Ibid.) Petitioner seeks an order compelling the production of the requested documents, along with her expenses and attorney fees pursuant to section 1604 of the Corporations Code. (Id. at ¶ 19.)

II. Legal Standard

The function of a demurrer is to test the legal sufficiency of a pleading. (Trs. Of Capital Wholesale Elec. Etc. Fund v. Shearson Lehman Bros. (1990) 221 Cal.App.3d 617, 621.) Consequently, “[a] demurrer reaches only to the contents of the pleading and such matters as may be considered under the doctrine of judicial notice.” (South Shore Land Co. v. Petersen (1964) 226 Cal.App.2d 725, 732, internal citations and quotations omitted; see also Code Civ. Proc., § 430.30, subd. (a).) “It is not the ordinary function of a demurrer to test the truth of the plaintiff’s allegations or the accuracy with which he describes the defendant’s conduct. … Thus, … the facts alleged in the pleading are deemed to be true, however improbable they may be.” (Align Technology, Inc. v. Tran (2009) 179 Cal.App.4th 949, 958, internal citations and quotations omitted.)

In ruling on a demurrer, the allegations of the pleading must be liberally construed, with a view to substantial justice between the parties. (Glennen v. Allergan, Inc. (2016) 247 Cal.App.4th 1, 6.) Nevertheless, while “[a] demurrer admits all facts properly pleaded, [it does] not [admit] contentions, deductions or conclusions of law or fact.” (George v. Automobile Club of Southern California (2011) 201 Cal.App.4th 1112, 1120.)

III. Request for Judicial Notice

Altaba’s request for judicial notice is GRANTED as to its and Yahoo!’s SEC filings (request nos. 1-13), with regard to the existence and contents of those filings only. (Evid. Code, § 452, subds. (c) and (h); StorMedia, Inc. v. Superior Court (Werczberger) (1999) 20 Cal.4th 449, 456, fn. 9 [taking judicial notice of the existence of proxy statement and registration statement filed with SEC]; Sosinsky v. Grant (1992) 6 Cal.App.4th 1548, 1564-1568 [court cannot take judicial notice of the truth of hearsay statements or facts set forth in otherwise judicially noticeable documents].) Its request is also GRANTED as to filings in the shareholder derivative action (request nos. 14-15, 17, 20-21, and 27-28) with the same caveat. (Evid. Code, § 452, subd. (d).)

Altaba’s request is DENIED as to correspondence between the parties and discovery and other documents that they exchanged in connection with this action, the derivative action, and a Delaware inspection action filed by one of the derivative plaintiffs (request nos. 16, 18-19, 22-26, 29-33, and 35). These documents constitute evidence beyond the allegations of the Petition that is not properly considered by the Court on demurrer. Altaba’s request is also DENIED as to an unpublished order in an unrelated derivative action in this Court (request no. 34). (See Cal. Rules of Court, rule 8.1115(a) [unpublished California opinions “must not be cited or relied on by a court or a party in any other action”].)

IV. Analysis

Altaba demurs to the petition on the grounds that (1) petitioner fails to allege a proper purpose supporting her inspection demands and (2) Altaba has already agreed to produce all of the documents that she is entitled to under section 1601.

A. Proper Purpose

Section 1601 states that a shareholder’s reason for inspection must be “for a purpose reasonably related to such holder’s interests as a shareholder.” (Corp. Code, § 1601, subd. (a).) While a competitor’s attempt to use the corporation’s information against it or a shareholder’s engagement in a mere “fishing expedition” would not satisfy this requirement (see Dandini v. Superior Court (1940) 38 Cal.App.2d 32, 35 [discussing predecessor statute]; Most v. First Nat. Bank of San Diego (1966) 246 Cal.App.2d 425, 429 [same]), courts have held that shareholders’ attempts to investigate alleged wrongdoing and assert their interests against officers, directors, or controlling shareholders constitute a proper purpose for an inspection demand. (See Schnabel v. Superior Court (Schnabel) (1993) 5 Cal.4th 704, 715 [spouse’s attempt “to ascertain the value of the stock [bearing on] the community’s and [her spouse’s] financial status” for purposes of dissolution proceeding was a proper purpose]; Laher Spring & Tire Corp. v. Superior Court (1942) 52 Cal.App.2d 467, 468 [inspection of share register to associate with other shareholders based on a belief “that the officers of the corporation have illegally failed to pay accrued dividends to the shareholders” was proper]; Homestake Mining Co. v. Superior Court (1936) 11 Cal.App.2d 488, 496 [desire “to determine whether the relation of the directors was against the interest of the minority stockholders” was a proper purpose]; Capron v. Pacific Southwest Discount Corp. (1935) 6 Cal.App.2d 436, 437-439 [investigation of president’s potential use of corporate funds for an improper purpose justified an inspection demand].)

Altaba contends that petitioner’s investigation of alleged wrongdoing by Yahoo!’s officers and directors in order to buttress the allegations in her derivative complaint is not a proper purpose. To support this argument, it cites Bezirdjian v. O’Reilly (2010) 183 Cal.App.4th 316 for the proposition that section 1601 does not authorize discovery in an ongoing lawsuit. However, Bezirdjian addressed a shareholder’s argument that, where the trial court had entered judgment on the pleadings for failure to plead demand futility, he was entitled to discovery on this issue within the derivative action itself. In rejecting that argument, the appellate court noted that plaintiff had not attempted to directly exercise his inspection rights under section 1601. (Id. at p. 328.) It observed that “[p]laintiff does not explain why he did not take advantage of the inspection privileges accorded to him by section 1601 to assemble … facts” showing demand futility. (Ibid.) Contrary to Altaba’s interpretation of the case, this reasoning suggests that seeking facts to bolster the allegations in a derivative complaint is a proper purpose for an inspection demand under section 1601—the plaintiff in Bezirdjian simply failed to “take advantage” of this opportunity.

Finally, Delaware courts interpreting that state’s shareholder inspection statute have long held that inspection demands may be used to investigate potential mismanagement that would support derivative claims. (See King v. VeriFone Holdings, Inc. (Del. 2011) 12 A.3d 1140, 1150 [shareholder had a proper purpose where his derivative complaint was dismissed without prejudice and he sought an inspection “to aid him in pleading demand futility in a to-be-amended derivative complaint”].) Considering the cases cited above, the Court finds no reason to doubt that California law is consistent with Delaware law on this point. While Altaba argues that Delaware courts would not permit a shareholder inspection where a derivative plaintiff no longer has a positive right to amend his or her complaint, the Court is not convinced this is so. The opinions relied on by Altaba are largely unpublished and support only the more limited proposition that a derivative plaintiff who has been specifically denied further leave to amend lacks a proper purpose for a shareholder inspection. Here, the Court has not indicated whether it will grant the derivative plaintiffs any further leave to amend. While the Court shares the Delaware courts’ view that a derivative plaintiff should serve and litigate any inspection demand before or soon after filing a derivative complaint, it will not deny petitioner any further information to which she may be entitled on this basis.

Considering the above authorities, the Court finds that petitioner has alleged a proper purpose for her inspection demand.

B. Scope of Petitioner’s Demand

Altaba further contends that it has already agreed to produce all the documents to which petitioner is entitled under section 1601: namely, “minutes of … the board and committees of the board.” (Corp. Code, § 1601, subd. (a).) Petitioner contends that section 1061 more broadly encompasses all of the documents that she seeks, and, in any event, this issue is not properly resolved on demurrer where it is undisputed that petitioner is entitled to at least some of the documents she has demanded.

Whether or not Altaba’s arguments are correct as to the proper scope of section 1601, petitioner is correct that its demurrer on this ground must fail. (See Greater San Diego County Association of Realtors, Inc. v. Sandicor Inc. (S.D. Cal., May 25, 2016, No. 16CV96-MMA (KSC)) 2016 WL 4597536, at *11-12 [overbreadth of section 1601 demand did not support dismissal of plaintiff’s claim “[s]o long as Plaintiff states it was denied inspection of some documents it was entitled to inspect”].) Where the Petition alleges that Altaba has not yet produced any documents in response to petitioner’s demand, the Court cannot make findings regarding whether Altaba’s production is complete on demurrer. Nor can it properly consider the scope of the productions petitioner has received in connection with other actions, which are not a proper subject of judicial notice. While petitioner appears to concede that she has now received the documents Altaba promised to produce in this action, she contends that at least one exhibit to board minutes was improperly withheld, and the parties have raised potential privilege disputes with the Court in the past. Further, petitioner’s entitlement to her expenses and attorney fees under section 1604 is not properly decided on demurrer, since the Court must assess whether Altaba’s response to her demand was justified based on the relevant facts to rule on this issue. (See Corp. Code, § 1604 [award is proper “if the court finds the failure of the corporation to comply with a proper demand [under section 1601] was without justification”].)

For these reasons, Altaba’s argument that petitioner’s inspection demand is overbroad is not appropriately addressed on demurrer.

C. Parties’ Remaining Requests

The parties’ respective requests that the Court determine petitioner’s entitlement to fees and expenses on demurrer are denied for the reasons discussed above. Petitioner further requests that the Court “summarily grant” her petition and order Altaba to produce all of the requested documents on the basis that Altaba’s arguments against this outcome are frivolous. The Court is not prepared to rule of the merits of Altaba’s arguments and petitioner’s request for a summary ruling on her petition is accordingly denied. Altaba has a right to answer the petition and oppose it on its merits.

V. Conclusion and Order

The demurrer is OVERRULED.

The Court will prepare the order.