October 2022 in Brief: Corporations, LLCs & Partnerships

Delaware Court of Chancery Finds That Stockholder’s Broad Section 220 Demand Lacked the Precision and Plus Factors Required to Entitle Stockholder to Additional Materials

By K. Tyler O’Connell & Barnaby Grzaslewicz of Morris James LLP

In reviewing the propriety of a stockholder’s Section 220 demand to inspect corporate records, the court determines (1) whether the stockholder has stated a proper purpose; and (2) whether the requested documents are essential to the accomplishment of the proper purpose. Where the stated purpose of a Section 220 demand is to investigate alleged corporate wrongdoing that is the subject of other pending investigations or litigation, precedents have required one or more “plus factors” in addition to the mere pendency of an investigation or litigation to establish a credible basis to suspect wrongdoing. In this decision of the Court of Chancery, Oklahoma Firefighters Pension & Ret. Sys. v. Amazon.com, Inc., C.A. No. 2021-0484-LLW (Del. Ch. June 1, 2022), the Court held that the stockholder failed to establish the requisite plus factors, and, in all events, the company had already produced sufficient records for the accomplishment of the stockholder’s purpose.

The stockholder-plaintiff made a Section 220 demand to inspect the corporate records of Amazon.com, Inc. in order to investigate alleged mismanagement and noncompliance with domestic antitrust and tax laws. In support of the demand, the stockholder cited to, among other things, newspaper reports of federal government investigations into Amazon antitrust violations, a state attorney general’s lawsuit against Amazon, a state administrative tax fine against Amazon, and an Italian regulator’s fine against Amazon. In reviewing these circumstances, the Court considered whether the stockholder-plaintiff had presented any recognized plus factors, such as the scale of the investigations/litigations, the severity of the results of the inquiries, or other corporate trauma. Because the investigations/litigations were either ultimately dropped, one-offs, or related to foreign investigations (whereas the demand alleged Amazon’s noncompliance with domestic laws), the Court held that the stockholder-plaintiff had not demonstrated the required credible basis to further investigate any wrongdoing through the Section 220 demand.

The Court also held that, despite the lack of a proper purpose, Amazon had already produced many board-level documents that were more than sufficient to meet the stated purpose. Finally, in response to the plaintiff’s complaint that Amazon had redacted as irrelevant parts of board materials relating to other company business, the Court held that this may be appropriate in the Section 220 context, where the scope of production is intended to be narrow and tailored to the stockholder’s proper purpose.

Delaware Court of Chancery Sustains Claims for Improper Termination of Agreements for Cause in Connection with a Joint Venture to Develop Data Centers for Amazon

By Albert H. Manwaring, IV and Bryan Townsend of Morris James LLP

Two entities entered into a joint venture to develop data centers for Amazon. One entity managed the joint venture day-to-day; the other controlled the board and had removal rights under certain circumstances. When whistleblowers raised concerns of potential kickbacks and the FBI executed a search warrant on the managing entity’s CEO, the second entity issued letters seeking to remove the CEO and corporate affiliates from their roles in the joint venture for cause and to terminate certain other agreements. The managing entity then filed suit in an action styled W.D.C. Holdings, LLC v. IPI Partners, LLC, C.A. No. 2020-1026-JTL (Del. Ch. June 22, 2022) to challenge its and its affiliates’ removal and the termination of the other agreements. The defendants moved to dismiss.

Applying the plaintiff-friendly reasonable conceivability standard at the pleadings stage, the Delaware Court of Chancery held that the well-pled facts supported a reasonable inference that the CEO was not aware of any kickbacks, and thus a for-cause event had not occurred. The Court reasoned that the inference that the CEO was not aware of a kickback scheme meant his conduct did not constitute the gross negligence, willful misconduct, or fraud that would be required to constitute a for-cause event under the governing LLC agreement. The Court rejected defendants’ argument that the issuance of an FBI search warrant was a sufficient basis to conclude a crime had been committed and that a for-cause event therefore existed. The Court explained that the for-cause language in the joint venture agreement did not include such preliminary steps in the criminal justice process. The Court also pointed to a series of plaintiffs’ allegations that supported the inference that defendants had created a pretext to terminate the plaintiffs and had financial incentive to do so. Accordingly, the Court concluded that plaintiffs had stated a claim that defendants improperly exercised their termination and removal rights in order to obtain control of the joint venture.