On July 28, the Delaware Supreme Court issued an opinion in Roberta Ann K.W. Wong Leung Revocable Trust U/A v. Amazon.com Inc., clarifying the standards applicable to assessing the legitimacy of a books and records demand's stated purpose and its satisfaction of the credible basis requirement.

The decision serves as a stark warning to corporations challenging demands under Section 220 of the Delaware General Corporation Law.

The Delaware Supreme Court made clear in its opinion that a corporation cannot defeat a Section 220 books and records demand solely by attacking the scope of the demand's stated purpose. Even in the face of a relatively unrestricted scope, the sufficiency of the evidence allegedly giving rise to a credible basis to suspect misconduct must be the focal point of any attack.

Further, the court explained that credible basis allegations resting primarily on evidence of government investigations and litigation do not face any heightened burden or require any "plus factor," but instead are subject to the same fact-intensive inquiry as any evidence identified to support a Section 220 demand.

Background

The Books and Records Demand

In October 2023, the Roberta Ann K.W. Wong Leung Revocable Trust U/A, a stockholder of Amazon.com Inc., sent a Section 220 books and records demand to Amazon.

Section 220 allows a stockholder to inspect a corporation's books and records if the stockholder demonstrates, among other things, a proper purpose. Courts have established that a stockholder's investigation of possible corporate mismanagement or wrongdoing can constitute a proper purpose, but the stockholder must present some evidence to suggest a credible basis from which a court can infer that mismanagement or wrongdoing may have occurred.

In the Amazon case, the stockholder's demand stated that its "proper purpose is to investigate potential corporate mismanagement, wrongdoing, and waste by fiduciaries of [Amazon], including the Board of Directors … and executive officers of Amazon." The demand also alleged that:

Amazon's fiduciaries have authorized or allowed [Amazon to] take unlawful advantage of [its] dominant [marketplace] position to engage in anticompetitive practices, leading to U.S. and international regulatory scrutiny, lawsuits, and fines[, and that] Amazon utilized a set of interlocking anticompetitive and unfair strategies to illegally maintain its monopoly power that benefits the products it makes and sells internally versus third-party sellers that utilized [Amazon]'s marketplace.

The demand included a chronology of "Amazon's history of monopolistic behavior" and referenced several events, including:

• Multiple investigations from 2019 to 2022 by the European Commission into Amazon's possible anticompetitive behavior, one of which resulted in Amazon making formal commitments to address the European Commission's concerns and avoid a $47 billion fine;
• An April 2020 Wall Street Journal article concerning Amazon's use of independent seller data that purportedly violated Amazon's internal policies;
• A report from the U.S. House Judiciary Committee's Subcommittee on Antitrust, Commercial and Administrative Law, which made policy recommendations following testimony from Amazon's former CEO;
• Remedial measures and a €1.13 billion ($1.32 billion) fine imposed by the Italian Competition Authority following a 2021 finding that certain Amazon subsidiaries engaged in practices that infringed European Union competition rules;
• A 2022 consent decree in which Amazon agreed to stop its "Sold by Amazon" program and to give annual updates on its compliance with antitrust laws, following a lawsuit by Washington state regarding Amazon's treatment of third-party sellers; and
• A 2022 lawsuit — California v. Amazon in the Superior Court of the State of California, County of San Francisco — alleging that Amazon violated California antitrust and unfair competition laws relating to third-party sellers and wholesale suppliers.

In addition to these lawsuits and investigations, the demand relied on a September 2023 lawsuit — FTC v. Amazon in the U.S. District Court for the Western District of Washington — that the Federal Trade Commission and 17 states filed following a four-year FTC investigation.

The FTC action alleged that Amazon violated state and federal antitrust laws and had a "durable monopoly power" in the "online superstore market." Although the FTC lawsuit was not yet resolved, most claims survived Amazon's motion to dismiss.

The stockholder demanded to inspect books and records related to, among other things, Amazon's:

[C]ompliance with antitrust or competition laws, including state and federal antitrust laws in the U.S. and in the EU, including investigations into Amazon's compliance with such laws and lawsuits filed against [Amazon] regarding antitrust laws or anticompetitive conduct, including, but not limited to, the FTC [c]omplaint, California's lawsuit, and Washington's lawsuit.

In response, Amazon challenged the legitimacy of the purpose alleged, arguing that it was overbroad in scope. Amazon nevertheless "agreed to produce a 'targeted set of materials' on the condition that the [stockholder] enter into a confidentiality agreement." The stockholder declined and brought the Section 220 action in December 2023.

The Magistrate's Final Report and the Court of Chancery's Opinion

In April 2024, following a one-day trial before the Delaware Court of Chancery, Magistrate Bonnie W. David issued a final report recommending that the court deny the stockholder's inspection demand on the ground that it "failed to present sufficient evidence to suggest a credible basis from which the [c]ourt can infer possible wrongdoing."

In her report, the magistrate relied in part on a prior Section 220 action against Amazon in which the Court of Chancery denied a stockholder's books and records demand and held that "the evidence of potential malfeasance regarding alleged anticompetitive conduct lacks the sort of 'plus factor' found in" similar Section 220 actions "where ongoing government investigations and lawsuits contributed to the satisfaction of the credible basis standard."

The magistrate also stated that the current FTC complaint "pleads allegations, not evidence." She further concluded that the circumstances and outcomes of the other lawsuits and investigations fell short of establishing a "credible basis to investigate wrongdoing" because they identified "a handful … of lawsuits, many of which merely repeat the allegations in the FTC [c]omplaint and [establish] only that Amazon has paid 'relatively minor amounts.'"

On appeal, Vice Chancellor Lori W. Will, in October 2024, adopted the magistrate's report and denied the stockholder's inspection demand. The vice chancellor concluded, however, that "it was unnecessary to decide whether the [stockholder] satisfied its credible basis burden because [t]here is a more fundamental problem with the … demand: the scope of its stated purpose is facially improper."

According to the vice chancellor, the books and records demand's stated purpose was "astoundingly broad," as it concerned "any possible anticompetitive conduct by a global conglomerate at any time anywhere in the world." The vice chancellor then concluded that the determination of whether the stockholder presented "sufficient evidence to satisfy the credible basis standard is meaningless when it failed to articulate a lucid purpose in the first place."

The stockholder appealed both the vice chancellor's ruling as to the scope of the demand's stated purpose and the magistrate's ruling as to the evidentiary burden required to establish a credible basis.

The Delaware Supreme Court's Reversal

On July 28, the Delaware Supreme Court reversed, rejecting both the Court of Chancery's and the magistrate's analyses. The court held that the vice chancellor erred by "beginning and ending" her analysis solely on the scope of the demand's stated purpose. As the court explained, "Denying an inspection demand based on a facial evaluation of the 'scope' of the purpose, without considering whether the evidence established a credible basis for that purpose, is not the framework under which [the Court of Chancery] evaluate[s] Section 220 demands."

The court acknowledged that a stockholder's "'mere statement of a purpose to investigate possible general mismanagement, without more,' is insufficient to establish entitlement to inspection."

But the court explained that the required "more" is not a narrower or clearer purpose, but rather satisfaction of the credible basis standard, i.e., some evidence to establish a credible basis of mismanagement or wrongdoing warranting further investigation. The vice chancellor, therefore, could not reject the demand solely based on the scope of its purpose; rather, the vice chancellor "was required to continue [her] analysis by engaging with the evidence presented" by the stockholder.[1]

The Delaware Supreme Court then separately rejected the magistrate's finding that the stockholder did not present sufficient evidence of a credible basis.

The court began by noting that demonstrating a credible basis does not require a stockholder to show actual waste or mismanagement, and that the credible basis standard requires the "lowest possible burden of proof under Delaware law," stating, stockholders "need only show, by a preponderance of the evidence, a credible basis from which the Court of Chancery can infer there is possible mismanagement that would warrant further investigation — a showing that 'may ultimately fall well short of demonstrating that anything wrong occurred.'" 

The Delaware Supreme Court also rejected the magistrate's conclusion — based on a reading of the Court of Chancery's June 2022 decision in Oklahoma Firefighters Pension and Retirement System v. Amazon — that a demand must satisfy the higher burden of containing additional evidence or a plus factor in cases primarily concerning government investigations and litigation.

According to the Delaware Supreme Court, the credible basis standard is not elevated even in such cases, and although satisfying this standard often requires more than a mere untested allegation of wrongdoing, it does not require that the underlying litigation result in a full victory on the merits against the company.

As the court explained: "[W]here a stockholder presents evidence of ongoing investigations and lawsuits, and those investigations and lawsuits have advanced beyond untested allegations, then the evidence can be sufficient to meet the credible basis standard, especially when liability or fines could result in a corporate trauma."

The court then concluded that the evidence presented by the stockholder — i.e., the FTC complaint, most of which survived Amazon's motion to dismiss; the lawsuit by California, which continues following a court's denial of Amazon's demurrer; the lawsuit by Washington state, which culminated in a consent decree and Amazon providing annual updates on compliance with antitrust laws; and the action by the Italian Competition Authority, which resulted in a €1.13 billion fine paid by Amazon — "[when] taken together … [was] sufficient to establish a credible basis from which a court can infer that Amazon has engaged in possible wrongdoing through its purported anticompetitive activities."

The Delaware Supreme Court therefore reversed the Court of Chancery's judgment and remanded the case for further proceedings to determine the scope and conditions of production consistent with its decision.

Takeaways

The Amazon case makes clear that a corporation cannot defeat a Section 220 books and records demand solely by attacking the scope of the demand's stated purpose without also analyzing whether the demand presents some evidence of a credible basis of mismanagement or wrongdoing warranting further investigation. Although corporations still should highlight the overbreadth or vagueness of a demand's stated purpose, this should be coupled with a challenge to the sufficiency of the demand's evidence regarding its credible basis.

As the case demonstrates, such analyses will be highly fact-dependent. Arguing that a government investigation or lawsuit remains pending or did not result in an adjudication adverse to the corporation will not, by itself, defeat the establishment of a credible basis, particularly given the Delaware Supreme Court's rejection of a plus-factor requirement in cases resting primarily on government investigations and litigation.

On the other hand, if such ongoing investigations or lawsuits have not "advanced beyond untested allegations," then corporations would be well served to emphasize the nascency of these proceedings in their credible basis challenges.

Additionally, although not directly relevant to the Amazon decision, the Delaware General Assembly's March amendments to Section 220 must be taken into account in any challenge to a books and records demand.

The amendments codify and clarify certain critical elements of the jurisprudence Delaware courts have developed in defining the limits of Section 220. Among other things, they set forth the specific categories of books and records available under Section 220 and the standards applicable to an inspection demand.

Under the amendments, a stockholder may inspect the corporation's books and records only if (1) the stockholder's demand is made in good faith and for a proper purpose; (2) the demand describes with reasonable particularity the stockholder's purpose and the books and records the stockholder seeks to inspect; and (3) the books and records sought are specifically related to the stockholder's purpose.

In addition, the amendments delineate the specific categories of books and records available absent a heightened showing:

• The certificate of incorporation and any agreements incorporated by reference;
• Bylaws and any agreements incorporated by reference;
• Minutes of stockholder meetings and stockholder consent for three years preceding the date of the demand;
• All communications written to stockholders within the three years preceding the date of the demand;
• Minutes of any board or board committee meetings and records related thereto;
• Annual financial statements for the three years preceding the date of the demand;
• Certain contracts with stockholders; and
• Director and officer independence questionnaires.

To obtain books and records beyond these specific categories, the stockholder must show a compelling need in furtherance of the stockholder's articulated purpose, and demonstrate by clear and convincing evidence that the requested records are necessary and essential to further such purpose.

Finally, the amendments expressly provide that a corporation responding to a Section 220 demand may impose confidentiality requirements on the books and records produced, condition production on the corporation's right to use any of the material produced in responding to a complaint subsequently filed on the basis of the Section 220 production, and redact any portion of the material produced that is not specifically related to the stockholder's purpose.

The amendments do not apply to books and records demands made prior to Feb. 17, and, therefore, they were not considered by the court in the Amazon case. Going forward, however, corporations should be cognizant of the Amazon decision and the amendments, and should tailor their defenses to books and records demands accordingly.

References

[1] The Delaware Supreme Court also found that the vice chancellor misinterpreted the scope of the demand's stated purpose because, prior to trial, the stockholder had limited that scope by geographic region, content and timeframe. The court noted that a stockholder is permitted to limit the scope of a Section 220 demand during a litigation so long as the limitation does not prejudice the defendant.

Reprinted with permission of Law360.