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

In this action to inspect company books and records, the Delaware Court of Chancery granted a stockholder, Dennis Jacob, the right to inspect limited documents of Bloom Energy Corporation (“Bloom” or the “Company”)  for the purpose of investigating wrongdoing in connection with misrepresentations in Bloom’s financial statements and the performance of its clean and sustainable energy technology.  The Court also denied a stockholder, Michael Bolouri, the right to inspect documents due to a failure to comply with the technical requirements of the books and records statute -- Section 220 of the Delaware General Corporation Law (“Section 220”).  The demands to inspect Bloom’s books and records from Jacob and Bolouri sought, among other things, board materials and electronic communications relating to four categories of identified documents.  In granting limited inspection rights to Jacob, the Court concluded that Jacob failed to carry the burden to prove the emails and other electronic communications among the members of the board of directors of Bloom were necessary and essential to fulfill his investigative purpose.

In September of 2019, forensic analysts at Hindenburg Research published a report (the “Hindenburg Report”) that documented an investigation into potential misrepresentations by Bloom.  In preparing the report, the research analysts reviewed public filings relating to Bloom as well as previously filed lawsuits and interviewed industry experts and customers.  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 other words, Bloom’s technology was not profitable or clean.  The Hindenburg Report included the methodologies used in the report and a link to the data collected, which provided readers with the tools necessary to replicate its analysis.  Bloom responded to the Hindenburg Report by filing a Form 8-K with the Securities and Exchange Commission stating that certain previously issued financial statements should not be relied upon due to an accounting error in connection with the MSAs and that Bloom would revise how it accounts for certain revenues.

Following the Hindenburg Report and Bloom’s Form 8-K, Jacob and Bolouri delivered separate demands to the Company, each of which identified four categories of Bloom’s books and records. Both demands stated four purposes for inspection: “(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.”  Bloom rejected both demands and plaintiffs initiated the Section 220 action.

The Court denied the Bolouri demand because it was not accompanied by satisfactory documentary evidence demonstrating that he was a Bloom stockholder on the date of his demand -- the account statement Balouri provided was over a year old. The Court explained that both documentary evidence of the beneficial ownership of stock and a statement that the documentary evidence is a true and correct copy of what it purports to be is require by Section 220.  The Court further stated that the failure of Bolouri to include documentary evidence of his status as a beneficial owner could not be remedied by an affidavit as the affidavit simply verifies that the documentary evidence is true and correct.  Accordingly, the Court determined that Bloom was justified in rejecting Bolouri’s demand.

As for Jacob’s demand, although Bloom argued that the Hindenburg Report was incompetent evidence and the Form 8-K had rebutted the allegations in the Hindenburg Report, the Court found that the evidence set forth in the Hindenburg Report was sufficient to establish a credible basis for wrongdoing, the lowest burden of proof in Delaware law. The Court noted that the Hindenburg Report relied on publicly available and vetted information along with litigation filings and expert testimony, which was sufficient to show some evidence of wrongdoing by Bloom.  As to the claim that the Form 8-K served as a rebuttal to the Hindenburg Report, the Court noted that the Form 8-K stated that there was an accounting error in Bloom’s financials, which may actually lend credence to Jacob’s concerns regarding Bloom’s financial reporting. Accordingly, the Court found that Jacob had demonstrated a proper purpose for his demand.

With respect to the scope of the documents requested, Bloom objected to each individual category of documents as too broad.  Jacob requested, among other things, emails received by or on behalf of the board of directors or any committee thereof.  The Court noted the such emails extend “far beyond the formal board materials” that the Court typically finds sufficient to satisfy a stockholder’s purpose.  In finding that emails or other electronic communications of the Company’s directors were not necessary and essential to Jacob’s purpose, the Court explained that Jacob had not presented evidence that the board-level documents evidencing the directors’ decisions and deliberations would not be sufficient in connection with his demand, such as evidence to show that the board did not maintain formal board-level documents detailing its decision-making.  After further narrowing certain document requests, that Court entered a judgment in favor of Jacob with respect to his demand.

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