Haque v. Tesla Motors, Inc., C.A. No. 12651-VCS (Del. Feb. 2, 2017) (Slights, V.C.)

In this opinion, the Court of Chancery denied a stockholder’s request pursuant to Section 220 of the Delaware General Corporation Law to inspect certain books and records of Tesla Motors, Inc. (“Tesla”), finding that the stockholder had not stated a proper purpose for inspection because he had not demonstrated a credible basis from which the Court could infer possible wrongdoing.

Plaintiff Shahid Haque made two demands for the inspection of books and records of Tesla, which designs, manufacturers, and sells electric vehicles.  Plaintiff sought documents for the stated purpose of investigating whether Tesla’s directors and officers had breached their duty of loyalty in explaining why the company had on occasion missed quarterly sales guidance.  After Tesla declined the books and records demands, Plaintiff brought suit under Section 220 to compel inspection.  At trial, Plaintiff claimed that Tesla’s directors and officers had fabricated production issues in an effort to hide low demand for Tesla vehicles. 

In its post-trial opinion, the Court rejected plaintiff’s theory, finding that Plaintiff did not have a proper purpose for inspection because he had not satisfied his burden of showing credible evidence of wrongdoing.  For example, the Court disagreed with the contention that a factory shutdown, which affected vehicle production numbers more than delivery numbers, was intended to mask low demand.  The Court explained that it would not be unusual for a factory shutdown to have a greater effect on production than deliveries and that Tesla had previously anticipated the shutdown’s effect would be disproportionate.  The Court also rejected Plaintiff’s arguments that wrongdoing could be inferred from a “sudden jump” in production numbers from one quarter to the next and that, in one quarter, the number of vehicles delivered exceeded the number produced.  The Court explained that due to the complexity of Tesla’s production process and the customizability of its vehicles, multiple factors could adversely affect the number of vehicles produced and delivered to customers. 

The Court likewise rejected Plaintiff’s argument that a biography of Tesla’s founder, which stated that Tesla once experienced difficulties converting reservations into actual sales, supported an inference that Tesla still struggled with deliveries.  The Court found that the statements constituted inadmissible hearsay and, in any event, related to the company’s early days when it was experiencing growing pains.  Finally, the Court rejected Plaintiff’s argument that negative analyst reports, which speculated that Tesla may not be producing at capacity and noted that several executives had recently left the company, provided evidence of wrongdoing.  The Court held that negative news articles alone will not provide a proper purpose for a Section 220 demand and that the authors of the articles, including short sellers, had a personal interest in swaying the public’s perception of Tesla.

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