Deephaven Risk Arb Trading Ltd. v. UnitedGlobalCom Inc.

On January 12, 2004, UnitedGlobalCom, Inc. (UGC) (defendant), a Delaware corporation, announced a rights offering, expiring on February 12, that entitled its shareholders to subscription and oversubscription rights. The subscription rights allowed shareholders to purchase shares at a discounted price. The oversubscription rights allowed the shareholders who exercised their subscription rights to purchase additional shares. The number of shares available for oversubscription depended on the number of shareholders who failed to exercise their subscription rights. In total, UGC distributed 83 million subscription rights. After UGC announced its rights offering, Deephaven Risk Arb Trading, Ltd. (Deephaven) (plaintiff) began trading UGC stock. Deephaven used multiple brokerage accounts to hold short and long positions in UGC and would short-sell stock to itself. At the time of the rights offering, Deephaven was net short, meaning that it was borrowing more shares than it owned. However, Deephaven’s account at Barclays held only long positions that it had purchased through its own short sales. On February 13, UGC announced the initial results of the rights offering, under which Deephaven would receive one million shares from oversubscription rights. However, a week later, UGC announced the final results of its rights offering, under which Deephaven would receive only approximately 35,000 shares from oversubscription rights. The difference in oversubscription rights was the result of a different number of shareholders who had exercised their subscription rights. Deephaven sent a demand letter to UGC exercising its inspection rights, seeking to review UGC’s records related to the rights offering. Under Delaware law, stockholders, including beneficial owners of stock, had the right to inspect a corporation’s records. UGC refused the inspection demand. Deephaven filed a lawsuit in Delaware state court to enforce the demand. UGC asserted that Deephaven did not have standing to bring the lawsuit, arguing that because Deephaven was net short at the time of the rights offering, Deephaven did not own any UGC stock. Deephaven argued that it was a beneficial owner of the shares in its Barclays account in which it held a long position.