Court of Chancery: Section 220 Does Not Permit Stockholders to Act as “Inquisitors”
Amazon has become a target for plaintiffs’ lawyers, who seek to leverage regulatory inquiries as a basis to “investigate” potential wrongdoing at Amazon through Delaware Section 220 books and records demands. In Leung Revocable Trust U/A Dated 3/09/2018 v. Amazon, the Delaware Court of Chancery recently refused to “bless” one such demand, finding its “astoundingly broad” purpose to be improper.
By way of background, a stockholder who seeks to inspect books and records under Section 220 must state a “proper purpose” for the inspection. Where the purpose concerns an investigation into wrongdoing at the company, the stockholder must show a “credible basis” on which the court can infer possible mismanagement that would warrant further investigation.
In September 2023, the Federal Trade Commission (FTC) filed a complaint in the Western District of Washington that alleged “anticompetitive practices” at Amazon based on facts the FTC alleged it had uncovered over a four-year investigation. The Leung plaintiff, relying largely on the FTC complaint, served a books and records demand on Amazon. The demand sought to explore a number of disparate areas, including, among others, Amazon’s “sales of an Amazon-branded car trunk organizer that competed with a third-party trunk organizer,” the design of Amazon’s website, and favoring of “Prime Badge” sellers. Amazon agreed to discuss the production of documents, subject to certain “conditions.” The plaintiff refused to agree to those conditions and instead filed a lawsuit to enforce the demand.
The parties initially litigated the extent to which the FTC’s complaint supplied a “credible basis” to infer potential mismanagement at Amazon and thereby warrant further investigation. But this dispute turned out to be a red herring. The court found that it “need not resolve” that issue because there was a more “fundamental problem” with the demand: namely, that it presented “scattershot” allegations of wrongdoing aimed at numerous aspects of Amazon’s business model.
The court described the demand’s stated purpose as concerning “any possible anticompetitive conduct by a global conglomerate at any time anywhere in the world.” The court held that this was not a permissible purpose. As to the plaintiff’s reliance on government inquiries, the court found that the proceedings were “dissimilar in terms of time, jurisdiction, and subject matter,” which left the court “unable to discern” the precise area of proposed investigation. Ultimately, the court concluded that “Section 220 does not permit stockholders to act as inquisitors” and labeled the plaintiff’s demand as “abuse that this court cannot bless.”
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