James Wei and Yanxin Zhang v. Zoox, Inc.
C.A. No. 2020-1036-KSJM
| Del. Ch. | Jan 31, 2022Background
- Zoox, Inc. agreed to be acquired by Amazon for $1.3 billion; stockholders approved the merger and it closed in August 2020.
- Petitioners Wei and Zhang served appraisal demands and contemporaneously served Section 220 books-and-records demands; the merger closed before the five-business-day Section 220 response period expired, and the company said Petitioners lost 220 standing.
- Petitioners filed an appraisal action, voluntarily dismissed their Section 220 suit, and sought broad appraisal discovery (53 categories, including ESI/emails); they later narrowed ESI custodians and time period.
- Respondent produced "formal board materials," valuation documents, and waterfall analyses but resisted producing emails/ESI and moved for a protective order, arguing Rule 26 proportionality and that Petitioners seek appraisal only to investigate fiduciary claims.
- The Court ruled that Rule 26 proportionality does not, by itself, limit appraisal discovery based on the petitioner’s small stake, but where an appraisal is used as a substitute for a blocked Section 220 pre-suit investigation, discovery should be limited to what Section 220 would have yielded.
- The Court granted the protective order in part and directed the parties to present whether the documents already produced equal those obtainable under Section 220.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Rule 26 proportionality limits appraisal discovery based on small stake | Petitioners: appraisal discovery is broadly available; precedent forecloses dollar-value limits | Zoox: discovery costs far exceed amount in controversy, so Rule 26 proportionality should limit discovery | Court: Rejects limiting discovery solely because petitioner’s stake is small; Rule 26 factors include issue importance and statutory appraisal mandate |
| Whether an appraisal petitioner may pursue full discovery where purpose is pre-suit investigation of fiduciary claims | Petitioners: appraisal discovery can legitimately inform potential fiduciary claims (Cede) | Zoox: Petitioners are using appraisal as a proxy for Section 220 to investigate—policy disfavors discovery to create new claims | Court: Policy disfavors using appraisal as a substitute for Section 220; Cede does not extend so far as to permit full discovery when appraisal was commenced to investigate claims |
| Whether appraisal discovery should be limited to what Section 220 would have produced when Section 220 is unavailable through no fault of petitioner | Petitioners: should be entitled to at least the same materials sought in 220 | Zoox: appraisal should not be transformed into a 220 substitute; broad appraisal discovery would undermine 220 and encourage forum-shopping | Court: If appraisal was used because 220 was unavailable through no fault of the petitioner (e.g., private-company timing), discovery may be limited to the scope of documents that would have been available under Section 220 |
| Remedy in this case given petitioners’ small economic stake and timing | Petitioners: they will pursue appraisal and need discovery to value shares and evaluate claims | Zoox: the tiny stake and timing show the real purpose was pre-suit investigation; discovery burden disproportionate in practice | Court: Concludes Petitioners pursued appraisal as a substitute for 220 and therefore are limited to Section 220-equivalent documents; protective order granted in part, with parties to confer on whether produced materials already meet 220 scope |
Key Cases Cited
- Cede & Co. v. Technicolor, Inc., 542 A.2d 1182 (Del. 1988) (appraisal discovery may uncover fraud and be used in later fiduciary claims)
- Wal-Mart Stores, Inc. v. Indiana Elec. Workers Trust Fund, 95 A.3d 1264 (Del. 2014) (clarifies the "necessary and essential" standard for Section 220 inspections)
- AmerisourceBergen Corp. v. Lebanon Cty. Empls.' Ret. Fund, 243 A.3d 417 (Del. 2020) (describing scope of Section 220 and limiting inspection to formal board materials when appropriate)
- In re Appraisal of Dole Food Co., Inc., 114 A.3d 541 (Del. Ch. 2014) (discussion of liberal discovery in appraisal proceedings and valuation inquiry)
- DFC Global Corp. v. Muirfield Value P’rs, L.P., 172 A.3d 346 (Del. 2017) (Supreme Court appraisal decision emphasizing deal price relevance)
- Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd., 177 A.3d 1 (Del. 2017) (Supreme Court appraisal decision on fair value methodology)
- Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., 210 A.3d 128 (Del. 2019) (Supreme Court appraisal decision further explaining deal-price primacy)