Background
In September 2019, Hindenburg Research, an investment research firm with a focus on activist short-selling, published the Hindenburg Report, which documented an investigation into potential misrepresentations by Bloom. The Hindenburg Report concluded that:
(1) Bloom’s debt had reached ‘unsustainable levels’; (2) Bloom used deceptive accounting practices to hide servicing liabilities in its Master Servicing Agreements (MSAs); (3) Bloom inaccurately estimated the life of its fuel cells; (4) Bloom booked substantial write-downs in the pre-IPO period (where investors could not see the write-downs) while booking new revenue that improved the financials disclosed publicly in the IPO; and (5) Bloom was not a ‘clean’ energy company, placing the government subsidies it had garnered on that account in jeopardy.
In response to the Hindenburg Report, Bloom filed a Form 8-K with the Securities and Exchange Commission stating that certain previously issued financial statements were inaccurate because of an accounting error in connection with the MSAs. Bloom also advised it would revise how it accounts for certain revenues.
Following the Hindenburg Report and Bloom’s Form 8-K, Jacob and Bolouri each served separate demands for inspection of books-and-records on the Company. Each of the demands identified four categories of Bloom’s documents and stated that the purpose of those demands was:
(i) to investigate potential wrongdoing, mismanagement and breaches of fiduciary duties by management and the board of directors in connection with the circumstances described by the Hindenburg Report; (ii) to assess the ability of the board of directors to impartially consider a demand for action; (iii) to seek an audience with the board of directors to discuss potential reforms; and (iv) to take appropriate action in the event management and the board of directors did not properly discharge its duties.
The Company rejected those demands and both Jacob and Bolouri jointly filed an action under section 220 of the Delaware General Corporation Law (DGCL).
Analysis
I. Jacob’s demand
In asserting that Jacob had not stated a proper purpose for his inspection rights, Bloom argued that the Hindenburg Report was “incompetent evidence” to demonstrate a proper purpose because Hindenburg had “incentives to spin financial analyses to suit their own strategies.” The Company also argued that the Form 8-K had rebutted the allegations in the Hindenburg Report.
However, the court disagreed with this first argument and found that the Hindenburg Report was sufficient to establish a credible basis for wrongdoing – the lowest burden of proof in Delaware corporate law. The court observed that, by Bloom’s own admission, the Hindenburg Report relied “primarily on publicly available and vetted information along with litigation filings and expert testimony.” This, the court found, was sufficient to show some evidence of wrongdoing by Bloom.
As for Bloom’s claim that the Form 8-K sufficiently rebutted the Hindenburg Report, the court noted that the Form 8-K stated that there was an accounting error in Bloom’s financials, which may support (not refute) Jacob’s concerns regarding Bloom’s financial reporting. Thus, the court held Jacob had demonstrated a proper purpose for his demand.
Regarding the scope of documents that Jacob demand be produced, Bloom objected that each of the categories of documents Jacob sought was too broad. Jacob’s demand included inspection of emails received by or on behalf of Bloom’s directors or any committee on which those directors served. The court agreed that the demands were too broad and observed that this demand extended “far beyond the formal board materials” that the court typically finds sufficient to satisfy a stockholder’s purpose.
The court further explained that Jacob failed to present evidence that the board-level documents evidencing the directors’ decisions and deliberations would not be sufficient in connection with his demand. Therefore, after narrowing the scope of documents Jacob was entitled to inspect, the court entered judgement in Jacob’s favor.
II. Bolouri’s demand
The court denied Bolouri’s demand because Bolouri failed to properly demonstrate that he was a Bloom stockholder on the date of his demand. Bolouri included an account statement to demonstrate his ability to demand inspection, but that account statement was over one year old.
In denying Bolouri’s demand, the court explained that two things are required to demonstrate stock ownership: (i) documentary evidence of the beneficial ownership of stock and (ii) a statement that the documentary evidence is a true and correct copy of what it purports to be. The court held that the lack of documentary evidence could not be remedied by an affidavit because an “affidavit itself is not the evidence of ownership.” Instead, “the affidavit simply verifies the actual evidence of ownership is true and correct.” Accordingly, the court determined that Bloom was justified in rejecting Bolouri’s demand.
Key takeaways
The Delaware Court of Chancery’s opinion in Jacob v. Bloom Energy Corp. demonstrates that the court will allow stockholders to rely on third-party reports as a proper purpose for making a demand for inspection under section 220 of the DGCL. However, this opinion also reiterates that (i) demanding stockholders are not entitled to all board-level documents, (ii) a stockholder must make a basic evidentiary showing of beneficial ownership, and (iii) an affidavit in support thereof is not sufficient.
- 2021 WL 733438 (Del. Ch. Feb. 25, 2021).
Client Alert 2021-096
