DealLawyers.com Blog

Earlier this week, in Wong Leung Revocable Trust v. Amazon.com, (Del. 7/25), the Delaware Supreme Court overruled a prior Chancery Court decision dismissing a stockholder’s Section 220 action against Amazon. This excerpt from a recent Business Law Prof Blog post on the case summarizes the Court’s decision:

A stockholder sent a letter to Amazon, demanding to inspect books and records under Delaware’s Section 220. The stockholder’s stated purpose was to investigate Amazon’s possible wrongdoing and mismanagement by engaging in anticompetitive activities.

The request kicked of an extended legal battle. A Magistrate conducted a one-day trial that led to a report siding with Amazon that the the stockholder had not alleged a “credible basis” to infer possible wrongdoing by Amazon. The stockholder took exception. A Vice Chancellor also sided with Amazon, but on a different basis–finding that the stockholder’s purposes was overbroad, “facially improper,” and not lucid. The stockholder appealed and the Delaware Supreme Court reversed.

Under Delaware law, investigating corporate wrongdoing is a legitimate purpose, but stockholders must present “some evidence to suggest a credible basis from which a court can infer that mismanagement, waste or wrongdoing may have occurred.” The Supreme Court found that the Vice Chancellor had erred in its interpretation of the scope of the stockholder’s purpose and should have engaged “with the evidence presented by the [stockholder].”

On the evidentiary front, the stockholder pointed to a history of investigations, lawsuits, fines, and one Federal Trade Commission action against Amazon that survived a motion to dismiss. The Delaware Supreme Court stressed that the credible basis standard is the “lowest possible burden of proof under Delaware law.” It requires more than a “mere untested allegation of wrongdoing but does not require that the underlying litigation result in a full victory on the merits against the company.” Collectively, these predicates sufficed to “establish a credible basis from which a court can infer that Amazon has engaged in possible wrongdoing through its purported anticompetitive activities.” Now the matter heads back to Chancery to “determine the scope and conditions of production.”

The blog points out that if Amazon was incorporated in Nevada, this case would’ve turned out differently.  In fact, my guess is that the lawsuit never would’ve been filed in the first place. That’s because under Nevada’s statute (which I think we all may need to start getting more familiar with), stockholders in a public company don’t have inspection rights.

– John Jenkins