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.