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Chancery Grants Inspection Demand Relying on a Short-Seller’s Report

Jacob v. Bloom Energy Corp., C.A. No. 2020-0023-JRS (Del. Ch. Feb. 25, 2021)

In a post-trial opinion in this books-and-records action pursuant to 8 Del. C. § 220, the Court of Chancery granted a stockholder’s demand to inspect the records of Bloom Energy Corporation (“Bloom”) for the purpose of investigating mismanagement and wrongdoing respecting Bloom’s alleged financial and other misstatements concerning the performance of its self-described clean, sustainable and green energy alternative. The inspection demand drew heavily from a thoroughly researched report published by a short seller, Hindenburg Research (the “Hindenburg Report”), which concluded that “Bloom’s technology is not sustainable, clean, green, or remotely profitable." The publication of the Hindenburg Report prompted Bloom to file a Form 8-K with the SEC responding to the report and in a separate filing Bloom eventually acknowledged that it had misstated its financials in some respects in prior reporting periods.

Relying heavily on the Hindenburg Report, the stockholder plaintiff sought to inspect several categories of books and records for the purpose of investigating mismanagement and wrongdoing. As a prerequisite to inspection, a stockholder who satisfies the form and manner requirements of Section 220 must establish a proper purpose for his inspection demand. Where, as here, a plaintiff seeks to investigate wrongdoing, he must proffer some evidence to establish a credible basis to suspect wrongdoing, the lowest standard of proof under Delaware law. Bloom nevertheless argued that the Hindenburg Report was insufficient evidence to meet that burden—due largely to Hindenburg’s disclosed short position in the stock and its attendant financial incentive to see Bloom’s stock price suffer—and that Bloom’s Form 8-K had rebutted the allegations in the Hindenburg Report. The Court rejected Bloom’s arguments, holding that the Hindenburg Report’s various sources of facially credible information was sufficient to show some evidence to suspect wrongdoing by Bloom. With respect to the Form 8-K, the Court held that its filing actually provided some credence to the concerns expressed in the inspection demand given that the Form 8‑K acknowledged Bloom had misstated its financials for several reporting periods.

The Court, however, narrowed the scope of the requested inspection, holding that the plaintiff’s request for emails and other communications between Bloom’s officers and directors was not necessary or essential to the plaintiff’s stated purpose in the demand.

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