## Facts

- UnitedGlobalCom, Inc. (UGC) conducted a $1 billion transferable rights offering to Class A stockholders in early 2004, including subscription and oversubscription features.
- Deephaven Risk Arb Trading Ltd. (Deephaven), an investment fund using long/short strategies, acquired over 5 million rights during the offering period through multiple brokerage accounts.
- Deephaven was not a record holder of UGC stock; it asserted only beneficial ownership through brokerage-held positions.
- Although Deephaven’s overall exposure was net short, one brokerage account held actual long positions in UGC shares acquired through ordinary settlement.
- UGC announced preliminary results indicating Deephaven would receive about 1 million oversubscription shares, but final results reduced Deephaven’s allocation to roughly 35,000 shares based on the final exercise count.
- Deephaven demanded inspection of UGC’s books and records under DGCL § 220 to investigate the allocation discrepancy and assess potential claims.
- UGC refused, arguing Deephaven lacked § 220 standing because its positions (including being net short) did not reflect beneficial ownership.
- Deephaven filed a § 220 action; after trial but before decision, UGC merged into another entity, prompting briefing on whether the merger affected the pending inspection demand.

## Issues

1. Whether a net-short trader that holds specific long positions in a brokerage account qualifies as a “stockholder” (beneficial owner) with standing to demand inspection under DGCL § 220(a).
2. Whether a post-trial merger extinguishes or moots a pending § 220 inspection action seeking information about pre-merger events.
3. What scope of inspection is “necessary and essential” to a proper purpose related to the rights offering and oversubscription allocation.

## Decision

- The court held Deephaven had standing as a beneficial owner under DGCL § 220 despite its overall net-short posture.
- The court held the merger did not moot the pending § 220 action where Deephaven had standing when suit was filed and sought information about pre-merger events.
- The court granted inspection in part, limiting production to documents necessary and essential to Deephaven’s stated purpose concerning the rights offering and oversubscription allocation.

## Legal Principles

- Beneficial ownership for DGCL § 220 may be shown by an actual economic interest in specific shares held through a brokerage account; net economic exposure across accounts (including net-short status) does not, by itself, defeat standing.
- Investigating possible wrongdoing or mismanagement and evaluating potential litigation relating to corporate action affecting the stockholder can be a proper purpose under § 220 if reasonably related to the stockholder’s interest.
- A merger does not automatically extinguish a pending § 220 action filed by a stockholder with standing at filing, particularly where the request targets information about pre-merger conduct; relief may be tailored to current circumstances.
- Inspection under § 220 is limited to documents that are necessary and essential to the proper purpose, and cannot be used as a basis for broad, open-ended discovery.

## Conclusion

The court recognized § 220 standing for a beneficial owner that held specific long shares even though its overall strategy left it net short, held that a post-trial merger did not moot the pending inspection action, and ordered a purpose-focused, limited inspection tied to the rights offering’s oversubscription allocation.


Deephaven Risk Arb Trading Ltd. v. UnitedGlobalCom, Inc., 2005 WL 1713067 (Del. Ch. July 13, 2005)