Christopher & Banks Corporation
2400 Xenium Lane North
Plymouth, MN 55441
Attn: Luke R. Komarek, General Counsel and Corporate Secretary
Re: Demand for Inspection of Books and Records of Christopher & Banks Corporation Pursuant to 8 Del. C. 220 (the “Demand”)
Dear Mr. Komarek:
Macellum Advisors GP, LLC and its affiliated funds (“Macellum”) own approximately 5.1% of the outstanding common stock of Christopher & Banks Corporation (the “Company” or “Christopher & Banks”). Pursuant to Section 220 of the Delaware General Corporation Law (the “DGCL”), Macellum hereby demands that the Company make available for inspection and copying the Books and Records of the Company described in Exhibit 1.1 As evidence of Macellum’s ownership, enclosed with this letter is an affidavit attaching as exhibits Macellum’s most recent brokerage statement and Schedule 13D filed with the Securities and Exchange Commission.
This Demand seeks Books and Records of the Company regarding large sales of the Company’s stock by certain of the Company’s directors in the weeks prior to the Company’s announcements on October 7, 2014 and December 4, 2014 that it would be lowering its guidance. Following the announcements, the price of the Company’s stock dropped by 26% and 28%, respectively.
For purposes of this demand, the term “Books and Records” means all documents and other nonverbal methods of information storage of any nature whatsoever referring or relating to the listed topic, including, but not limited to, memoranda, board minutes, telephone records, diaries, data compilations, emails and other correspondence authored by or received by any of the Company’s directors, officers or other employees.
I.Trading by Anne Jones, Paul Snyder and David Levin Prior to the October 7, 2014 Announcement
On October 7, 2014, the Company meaningfully lowered its guidance and the Company’s stock price fell 26%. Between September 5 and September 12, 2014, just a few weeks before this precipitous drop, three of the Company’s directors sold a total of 83,000 shares of Christopher & Banks stock.
On September 8, 2014, Anne Jones, a director of the Company, filed a Form 4 with the SEC disclosing the sale of 40,000 shares of Christopher & Banks stock on September 5, 2014 for an average of $10.67 per share. The shares Jones sold represented 31% of the amount of Christopher & Banks shares she owned prior to the sale. The sale of the 40,000 shares was out of proportion with Jones’s prior trading practices and the Form 4 did not indicate that the shares were traded pursuant to a 10b5-1 plan. Indeed, Jones had only disposed of Christopher & Banks shares once before on June 22, 2006.
Also on September 8, 2014, Paul Snyder, a director of the Company, filed a Form 4 with the SEC disclosing the sale of 20,000 shares of Christopher & Banks stock on September 5, 2014 for an average of $10.56 per share. The shares Snyder sold represented 16% of the Christopher & Banks shares he owned prior to the sale. Since joining the Board in May of 2010, Snyder had never before sold Christopher & Banks shares and the Form 4 did not indicate that the shares were traded pursuant to a 10b5-1 plan.
On September 15, 2014, David Levin, a director of the Company, filed a Form 4 with the SEC disclosing a sale of 14,480 shares of Christopher & Banks stock on September 11, 2014 for an average of $10.58 per share and the sale of an additional 6,020 shares of Christopher & Banks stock on September 12, 2014 for an average of $10.59 per share. On September 18, 2014, Levin filed an additional Form 4 disclosing that he provided a gift of another 2,500 shares to a charitable organization on September 12, 2014. The 23,000 shares that Levin disposed of over September 11-12 represented 36% of the Christopher & Banks shares he owned prior to the sales. Levin had made only one prior sale of his holdings, which took place in January 2014. The Form 4 filed on September 15, 2014 did not indicate that the shares were traded pursuant to a 10b5-1 plan.
Within weeks of the Directors’ sales, the price of Christopher & Banks shares began a steady descent downward to $9.10 at the close of trading on October 6, 2014, the day before the Company’s catastrophic October 7 earnings announcement. Before the open on October 7, 2014, the Company issued a press release announcing that it would be materially lowering its total net sales guidance for the third quarter of fiscal 2014 from a range of $122 million to $124 million to a range of $114 million to $118 million (the “October 7 Press Release”). The Company attributed the decline in sales to “softness in mall traffic,” “lower than expected sales from its September fashion show,” and “late receipts associated with the West Coast port disruptions.” Following the announcement, the price of Christopher & Banks shares fell 26% from $9.10 at the close on October 6 to $6.76 at the open on October 7.
By selling in early-to-mid September 2014, when the price of Christopher & Banks shares was at its highest and just days before the price began to slide into the October 7 announcement, Levin, Snyder, and Jones collectively avoided over $300,000 in losses. Given the size of the sales in comparison to the directors’ past trading practices and the devastating nature of the news announced just a few weeks later, there is a credible basis to suspect that Levin, Snyder, and Jones may have sold stock while in possession of material nonpublic information that was soon to be released, in breach of their fiduciary duties.
II.Trading by Mark Cohn Prior to the December 4, 2014 Announcement
On its December 4, 2014 earnings call for the third quarter of fiscal 2014, the Company’s management announced that it was pushing back its previously announced operating margin target by a full year and that it was setting its fourth quarter guidance below analyst expectations (the “December 4 Announcement”). The announcement caused the Company’s stock to fall another 28% to a low of $4.85.
Just seven trading days before the regularly scheduled third quarter December 4 Earnings Announcement, on November 25, 2014, Mark Cohn, a director of the Company, filed a Form 4 with the SEC indicating that he had transferred 25,000 shares of Christopher & Banks stock pursuant to a divorce decree on November 21, 2014, when the price closed at $7.10. The shares Cohn transferred represented a massive 43% of the Christopher & Banks shares he owned prior to the transfer. By transferring the shares just a few days prior to the December 4 Announcement, the fair market value of Cohn’s transfer (on the date of the transfer), was approximately $53,750 higher than it would have been had he waited until after the close on December 4 to make the transfer.
Given the size of the transfer, as well as the nature of the news announced just a few days after the transfer, there is a credible basis to suspect that Cohn may have disposed of stock while in possession of material nonpublic information that was soon to be released, in breach of his fiduciary duties.
As explained more fully below, the purposes of the demanded inspection are:
1. To investigate potential wrongdoing, mismanagement and breaches of fiduciary duties by members of the Company’s board of directors or others in connection with trading in the Company’s securities;
2. To determine whether the current directors are fit to continue serving on the Company’s board of directors; and
3. To take appropriate action in the event certain directors or others did not properly discharge their fiduciary duties, including the preparation or commencement of a proxy solicitation regarding proposals to reform certain of the Company’s practices and procedures or to replace certain of the Company’s directors.
According to 8 Del. C. § 220(b)(2), a “proper purpose” shall mean a purpose reasonably related to such person’s interest as a stockholder. Under Delaware law, it is well established that a stockholder’s “desire to investigate wrongdoing or mismanagement is a ‘proper purpose’” for a books and records demand. Seinfeld v. Verizon Commc’n Inc., 909 A.2d 117, 121 (Del. 2006) (citing Nodana Petroleum Corp. v. State ex rel. Brennan, 123 A.2d 243, 246 (Del. 1956)). Investigating mismanagement is proper “because where the allegations of mismanagement prove meritorious, investigation furthers the interest of all stockholders and should increase stockholder return.” Id. (citing Saito v. McKesson HBOC, Inc., 806 A.2d 113, 115 (Del. 2002)).
Stockholders may use information about corporate mismanagement, waste or wrongdoing in several ways. For example, they may “seek an audience with the board [of directors] to discuss proposed reform or, failing in that, they may prepare a stockholder resolution for the next annual meeting, or mount a proxy fight to elect new directors.” Id. at 119-20 (quoting Saito v. McKesson HBOC, Inc., 806 A.2d 113, 117 (Del. 2002)). These possible courses of action are well within a stockholder’s rights under Delaware law, and thus gathering information for this purpose is proper.
Books and Records Sought
Accordingly, Macellum hereby demands the right to inspect and copy the Books and Records of the Company described in Exhibit 1.
Macellum hereby demands that: (1) originals or attested copies of the foregoing documents and records be made available for inspection and copying by Macellum, its designated representatives, or its attorneys or agents during usual business hours, beginning no later than five business days after the Company receives this letter, and continuing from day to day thereafter during usual business hours until the inspection is completed, or (2) the Company deliver copies of such records, within five business days after receipt of this letter, to the attention of the Company’s counsel, Douglas Rappaport, at the law firm of Akin Gump Strauss Hauer & Feld LLP, One Bryant Park, New York, NY 10036, Telephone: 212-872-7412. Macellum will reimburse reasonable copy costs if the documents are sent to Macellum’s counsel.
Please promptly advise Mr. Rappaport on or prior to the expiration of five business days after the date this demand is received by the Company, when and where the items demanded above will be made available to the Company, its designated representatives, or its attorneys or agents or, in lieu thereof, when copies of such items will be delivered to Macellum’s counsel.
I hereby affirm that the purposes for the demanded inspection as set forth above constitute a true and accurate statement of the reasons Macellum seeks to review the demanded books and records, and that such Demand is made in good faith. These purposes are both proper and reasonably related to its interest as a stockholder of the Company.
Enclosed is a power of attorney appointing Akin Gump Strauss Hauer & Feld LLP to act as an agent for the above-listed documents.