On January 31, 2022, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery partially granted a protective order brought by Zoox, Inc. (“respondent” or “Zoox”) limiting discovery requests by stockholders in a post-merger appraisal proceeding. Wei v. Zoox, Inc., C.A. No. 2020-1036-KSJM (Del. Ch. Dec. 07, 2020). The Court concluded that the “real purpose” of the discovery was “to facilitate a pre-suit investigation of a fiduciary duty claim,” therefore, discovery would be limited to information petitioners could have obtained in a typical action to inspect a company’s books and records.
On June 24, 2020, Zoox, an automotive technology company, entered into a merger agreement with Amazon.com, Inc., which was approved by written consent of Zoox’s stockholders the following day. On July 6, 2020, Zoox provided its stockholders an Information Statement that estimated merger consideration at $0.69 to $0.76 per share. A few weeks later, petitioners served a demand for appraisal of their company stock and for Section 220 discovery to investigate possible wrongdoing related to the merger. The merger closed before Zoox’s five-day period to respond to the 220 demand expired, after which Zoox rejected petitioners’ demand for lack of standing.
On August 13, 2020, petitioners sued to enforce their Section 220 rights and thereafter withdrew their appraisal demands as to more than 95% of their shares. Petitioners thereafter initiated appraisal proceedings under Section 262 for the remaining shares included in the appraisal demand, notionally valued at less than $2,000, and voluntarily dismissed their Section 220 action. Petitioners served extensive discovery demands in the appraisal proceeding that respondent argued imposed a significantly disproportionate burden on respondent given the de minimis value of the shares subject to appraisal and were clearly designed to investigate a follow-on claim for breach of fiduciary duty, not to prosecute the appraisal action.
The Court rejected respondent’s proportionality argument, affirming prior precedent that the scope of discovery is not determined by the size of an appraisal petitioner’s stake. The Court acknowledged that Court of Chancery Rule 26 was recently amended to require that discovery be proportional to the stakes of the case, and that the costs of petitioners’ discovery requests vastly exceeded the value of their shares. Nevertheless, the Court found that the relevant metric was the value the corporation itself, not the petitioners’ stake, and cautioned that the Rule 26 amendment was “not intended to change the scope of available discovery” under Delaware law.
The Court acknowledged, however, that the “miniscule size” of the petitioners’ economic interest made it apparent that the real purpose of the petition was to facilitate a pre-suit investigation of a fiduciary duty claim. Because Delaware law only permits stockholders limited access to corporate records pursuant to Section 220, the Court restricted the scope of discovery in the appraisal action using Section 220 standards. While conceding that Delaware courts have routinely permitted Section 262 petitioners to use discovery obtained from appraisal proceedings to support breach of fiduciary duty claims, the Court declined such a permissive approach where the sole purpose of the appraisal proceeding was to obtain pre-suit discovery.
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Wei v. Zoox, Inc.
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