Wei v. Zoox, Inc.

• Citation: 268 A.3d 1207
• Decision Date: 31 January 2022
• Docket Number: C.A. No. 2020-1036-KSJM
• Parties: James WEI and Yanxin Zhang, Petitioners, v. ZOOX, INC., Respondent.
• Court: Court of Chancery of Delaware

268 A.3d 1207

James WEI and Yanxin Zhang, Petitioners,

v.ZOOX, INC., Respondent.

C.A. No. 2020-1036-KSJM

Court of Chancery of Delaware.

Date Submitted: October 14, 2021

Date Decided: January 31, 2022

Joel Friedlander, Jeffrey M. Gorris, David Hahn, FRIEDLANDER & GORRIS, P.A., Wilmington, Delaware; Randall J. Baron, David A. Knotts, ROBBINS GELLER RUDMAN & DOWD LLP, San Diego, California; Christopher H. Lyons, ROBBINS GELLER RUDMAN & DOWD LLP, Nashville, Tennessee; Counsel for Petitioners.

David J. Teklits, Thomas P. Will, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; William D. Savitt, Anitha Reddy, WACHTELL, LIPTON, ROSEN & KATZ, New York, New York; Counsel for Respondent.

McCORMICK, C.

The petitioners filed this appraisal proceeding to solve what their attorneys view as a problem—the lack of access to evidence necessary to ferret out actionable fiduciary duty claims challenging M&A transactions. Due to circumstances somewhat unique to the private company setting, the petitioners were blocked from pursuing what has become the usual path to obtaining such evidence—a demand to inspect books and records under Section 220 of the Delaware General Corporation Law. Knowing that Delaware law typically entitles appraisal petitioners to relatively broad discovery, the petitioners filed this action and served discovery requests seeking emails and other documents. The respondent objected to the requests and moved for a protective order.

The respondent's lead argument is that the petitioners’ discovery requests are disproportionate to the needs of this case and should be reduced pursuant to Court of Chancery Rule 26. This decision rejects that argument, interpreting Rule 26 ’s proportionality requirement in the appraisal context consistent with prior decisions of this court holding that the size of an appraisal petitioner's stake does not dictate the scope of discovery.

The respondent alternatively argues that policy considerations militate against granting an appraisal petitioner full discovery where the petitioner's clear purpose is to investigate a follow-on claim for breach of fiduciary duty. This decision accepts that argument, holding that the miniscule size of the petitioners’ economic interests indicates that the real purpose of the petition is to facilitate a pre-suit investigation of a fiduciary duty claim. Invoking the court's broad discretion over the discovery process, this decision limits the petitioners to the information they could have obtained in a Section 220 action.

I. FACTUAL BACKGROUND

Respondent Zoox, Inc. ("Respondent" or the "Company") is an automotive technology company that was founded in 2014 to develop self-driving cars for ride-hailing services.¹ Under a merger agreement dated June 24, 2020, Amazon.com, Inc. agreed to acquire the Company for $1.3 billion. On June 25, 2020, the holders of the Company's common and preferred stock approved the merger agreement by written consent. On July 6, 2020, the Company issued an Information Statement to its stockholders estimating that the per-share merger consideration was $0.69 to $0.76.²

Petitioners James Wei and Yanxin Zhang (together, "Petitioners") owned Company common stock. When the merger agreement was executed, Wei held 13,000 shares and Zhang held 29,166 shares.³ On July 23, 2020, Petitioners each served a demand for appraisal pursuant to 8 Del. C. § 262 for their shares of Company stock.

Petitioners later made inspection demands on the Company pursuant to 8 Del. C. § 220 to investigate possible wrongdoing in connection with the merger.⁴ The Section 220 demands identified 23 categories of books and records that Petitioners sought to inspect.⁵

Section 220 grants a corporation five business days to respond to a Section 220 demand. The merger closed before that five-day period expired.⁶ On August 12, 2020, the Company informed Petitioners that the merger had closed and that, by operation of the merger, Petitioners no longer had standing to inspect documents under Section 220.⁷

The next day, Petitioners filed a complaint in this court to enforce their inspection rights under Section 220 (the " Section 220 Action").⁸

On October 9, 2020, Petitioners withdrew their appraisal demands as to more than 95% of their collective shares. Each continued to demand appraisal as to 1,000 of their shares, leaving 2,000 shares total subject to appraisal. The 2,000 shares are worth less than $2,000 at the merger price. Petitioners argue that their shares are worth more.⁹ Even accepting Petitioners’ allegations as true, it is unlikely that their stock is worth more than $20,000, which is ten times the merger consideration.¹⁰

Petitioners filed this action on December 7, 2020, and voluntarily dismissed the Section 220 Action three days later.¹¹ The notice of voluntary dismissal noted Petitioners’ belief that, in this appraisal action, they "would be entitled, at a minimum, to discovery of the same material sought" in the Section 220 Action.¹²

Petitioners served requests for documents on Respondent on January 15, 2021.¹³ The requests sought 53 categories of documents encompassing the 23 categories in Petitioners’ Section 220 demands.¹⁴

In response to Petitioners’ discovery requests, Respondent produced the documents referred to as "Formal Board Materials" in the Section 220 context.¹⁵ Respondent's production included all board-level materials concerning the Company's valuation and financial performance, the Amazon deal, alternative transactions, all non-disclosure agreements entered into with any potential counterparties to an alternative transaction, and a waterfall analysis of the liquidation preferences of the various classes of Zoox stockholders, updated as of July 31, 2019.¹⁶ After oral argument, Respondent prepared and delivered to Petitioners a waterfall analysis updated as of closing.¹⁷

Respondent objected to producing emails or other electronically stored information. Petitioners’ counsel then proposed protocols narrowing their discovery demands, requesting that Respondent search the electronic files of only three custodians over a fifteen-month period.¹⁸ Respondent nevertheless estimates that such protocols would generate vendor costs ranging from approximately $50,000 to $130,000.¹⁹

Respondent moved for a protective order on June 25, 2021. The court held oral argument on October 14, 2021.

II. LEGAL ANALYSIS

The court has broad discretion in determining the scope of discovery.²⁰ Respondent urges the court to exercise that discretion here to protect it from further discovery.

Respondent's lead argument is that Petitioners’ discovery requests violate the proportionality requirement of Court of Chancery Rule 26. Respondent further argues that Petitioners’ sole purpose in this appraisal action is to obtain discovery to support a follow-on claim for breach of fiduciary duty and that policy considerations weigh against permitting appraisal actions for this purpose.

This decision rejects Respondent's arguments under the proportionality requirement and then turns to the thornier policy questions raised by Respondent.

A. Under Established Precedent, The Proportionality Principle Does Not Limit The Scope Of Discovery.

Respondent argues that Petitioners’ discovery demands are "massively disproportionate to" the value of this litigation.²¹ Respondent has demonstrated that Petitioners’ discovery demands will result in costs in excess of $50,000.²² Respondent has persuasively argued that Petitioners’ shares will appraise for no more than $20,000 in the aggregate if Petitioners are entirely successful in this proceeding.²³ Because the costs of discovery exceed the amount in controversy, Respondent contends that Petitioners’ discovery requests run afoul of the proportionality requirement of Rule 26.

Petitioners respond that this court has repeatedly eschewed attempts to limit the scope of discovery in an appraisal proceeding based on the size of the petitioner's stake. Petitioners also point out that the 2019 amendment to Rule 26, which expressly adopted the principle of proportionality, did not alter this line of authority.

For the purpose of addressing Respondent's argument under Rule 26, the court assumes that Petitioners actually seek to appraise their shares and addresses whether the proportionality requirement alone should limit the scope of discovery in an appraisal based on the size of the petitioner's stake. Under established precedent, it does not.

Generally, this court construes the scope of discovery permitted under Rule 26 liberally in favor of the free exchange of information,²⁴ even in a statutory appraisal proceeding.²⁵

Rule 26 was amended in 2019 to expressly include a requirement that discovery be proportionate to what is at stake in the litigation. As amended, Rule 26 provides that "[p]arties may obtain discovery regarding any non-privileged matter that is relevant to any party's claim or defense and proportional to the needs of the case ."²⁶

Amended Rule 26 also lists six factors to consider when determining whether the discovery sought is proportional to the needs of the case, providing that

The frequency or extent of use of the discovery methods ... shall be limited by the Court if it determines that ... the discovery sought is not proportional to the needs of the case, considering [i] the importance of the issues at stake in the action, [ii] the amount in controversy, [iii] the parties’ relative access to relevant information, [iv] the parties’ resources, [v] the importance of the discovery in resolving the issues, and [vi] whether the burden or expense of the proposed discovery outweighs its likely benefit.²⁷

Rule 26 already contained most of these six factors before the amendment. The amendment added "relative access to information" and the balance of the "burden or expense of the proposed discovery" against "its likely benefit."²⁸

Before the 2019 amendment, this court repeatedly held that the size of an appraisal petitioner's holdings did not...