Haque v. Tesla Motors, Inc.: Court Denies Shareholder Request for Company Books and Records

In Haque v. Tesla Motors, Inc., No. 12651-VCS (February 2, 2017), the Delaware Court of Chancery declined shareholder Shahid Haque’s (“Plaintiff”) request to review the corporate books and records of Tesla Motors, Inc. (the “Company”), finding Plaintiff failed to demonstrate a credible basis from which the court could infer possible wrongdoing that would warrant further investigation.

According to the allegations, the Company designs, develops, manufactures, and sells fully electric vehicles and energy storage products. The production of these vehicles presents “complex design, engineering and manufacturing challenges” and is further complicated by a delicate supply chain comprised of more than 350 suppliers around the globe. Performance metrics are tracked in quarterly shareholder letters, including the number of vehicles produced and the number of vehicles delivered by the Company in that quarter.

When its production or deliveries have fallen short of targets, the Company has consistently maintained the “shortfalls are driven by production issues” and “not a lack of consumer demand for its vehicles.” Plaintiff questioned the truthfulness of these representations, and requested the books and records of the Company. After the Company refused to fully comply with Plaintiff’s demand, Plaintiff filed this action to compel the Company to release the relevant records pursuant to Section 220 of the Delaware General Corporation Law (“Section 220”).

“The right to inspect books and records under Section 220 is broad but not unlimited.”   Shareholders bear “the burden of establishing by a preponderance of evidence” that the shareholder: (1) owns stock of the company in question; (2) complied with Section 220 “respecting the form and manner of making a demand for inspection” of the documents; and (3) has a proper purpose. A shareholder also must present some evidence of a credible basis supporting the alleged purpose. 

The court found Plaintiff failed to establish a credible basis for the alleged wrongdoing. Plaintiff’s allegations rested on mathematical speculation based on production numbers disclosed by the Company to shareholders. Plaintiff specifically alleged discrepancies between the number of vehicles the Company could conceivably produce and the number of vehicles the Company actually produced and delivered in each quarter. The court disagreed with Plaintiff’s reasoning and concluded that:  “While some consistency in production levels is to be expected, merely highlighting that average production levels (weekly, monthly, quarterly, etc.) dropped from a prior quarter is not enough to support an inference that Tesla could be fabricating the timing of its vehicle production in order to mislead investors about why it cannot meet its vehicle delivery guidance.”

Accordingly, the court denied Plaintiff’s request to compel the release of Company books and records under Section 220.

The primary materials for this matter can be found on the DU Corporate Governance website.