In Re Zendesk, Inc. Section 220 Litigation

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

)
IN RE ZENDESK, INC. SECTION 220 ) Consolidated
LITIGATION ) C.A. No. 2023-0454-BWD
)

POST-TRIAL FINAL REPORT

Final Report: August 25, 2023
Date Submitted: August 21, 2023

Kimberly A. Evans and Robert Erikson, of BLOCK & LEVITON LLP, Wilmington,
Delaware; OF COUNSEL: Jason M. Leviton, Joel A. Fleming, and Lauren Godles
Milgroom, of BLOCK & LEVITON LLP, Boston, Massachusetts, Attorneys for
Plaintiffs Laborers’ District Council and Contractors’ Pension Fund of Ohio,
Amethyst Arbitrage International Master Fund, and Suzanne Rudy.

Ned Weinberger and Mark Richardson, of LABATON SUCHAROW LLP,
Wilmington, Delaware; OF COUNSEL: David Schwartz and John Vielandi, of
LABATON SUCHAROW LLP, New York, New York; Jeremy Friedman and David
Tejtel, of FRIEDMAN OSTER & TEJTEL PLLC, Bedford Hills, New York; and D.
Seamus Kaskela and Adrienne Bell, of KASKELA LAW LLC, Newtown Square,
Pennsylvania, Attorneys for Plaintiffs Laborers’ District Council and Contractors’
Pension Fund of Ohio, Amethyst Arbitrage International Master Fund, and Suzanne
Rudy.

Richard D. Heins and Tiffany Geyer Lydon, of ASHBY & GEDDES, P.A.,
Wilmington, Delaware; OF COUNSEL: Donald J. Enright and Noah R. Gemma, of
LEVI & KORSINSKY, LLP, Washington, D.C., Attorneys for Plaintiffs Rocky
Ongkowidjojo and Gary Buchheim.

Garrett B. Moritz and Holly E. Newell, of ROSS ARONSTAM & MORITZ LLP,
Wilmington, Delaware; OF COUNSEL: Stephen R. DiPrima and Joseph S. Tobin,
of WACHTELL, LIPTON, ROSEN & KATZ, New York, New York, Attorneys for
Defendant Zendesk, Inc.

DAVID, M.
In October 2021, Zendesk, Inc. (“Zendesk” or the “Company”) announced

that it had entered into an agreement to acquire Momentive Global Inc., formerly

known as SurveyMonkey, in an all-stock merger. That transaction, which valued

Zendesk common stock at approximately $124 per share, drew criticism from

Zendesk stockholders, including activist investor JANA Partners, who denounced

Zendesk’s “inexplicable” decision to use an “artificially depressed stock price” for

Zendesk in the deal.

In early February 2022, Zendesk’s board of directors (the “Board”) received

an unsolicited competing proposal from a consortium of private equity firms (the

“Consortium”) proposing to acquire Zendesk for a price between $127 and $132 per

share in cash. The Board rejected that proposal, concluding that it “significantly

undervalued” the Company. In response, JANA called for the Board to “be replaced

with capable fiduciaries or reverse course and engage with interested strategic and

financial buyers to sell the Company,” and declared its intent to launch a proxy

contest. A few weeks later, Zendesk stockholders overwhelmingly voted against the

issuance of Zendesk common stock required to consummate the Momentive

transaction.

After terminating the Momentive transaction, the Board commenced a process

to review strategic alternatives, during which it contacted 26 potential

counterparties. The process generated two indications of interest—one from the

1
Consortium for $120 per share and one from a second bidder for $125 to $135 per

share—but neither resulted in a financed bid. In early June, the Board decided to

terminate the strategic review and continue to execute on the Company’s strategic

plan as a standalone company.

While the strategic review was ongoing, the Board engaged with JANA in an

attempt to settle its proxy fight. As of June 17, 2022, the Board was prepared to

settle JANA’s proxy contest by ousting the Company’s CEO and replacing three

directors with JANA designees. The same day the settlement agreement was

prepared, however, the Consortium made a new (lower) acquisition proposal.

Management promptly cut the Company’s long-range forecasts and, based on those

lowered projections, the Board approved a sale at $77.50 per share, nearly 40%

lower than the proposal it had rejected four months earlier.

Eight Zendesk stockholders served demands pursuant to 8 Del. C. § 220

seeking to investigate possible wrongdoing in connection with that deal. In

response, Zendesk voluntarily produced 335 board-level documents, totaling 5,281

pages, concerning the issues raised in the demands. Plaintiffs now seek to

supplement that production with emails, claiming there are “gaps” and

“inconsistencies” in the formal board materials. In this final report, I conclude that

Plaintiffs have stated a proper purpose for inspecting books and records, but that the

materials already produced are sufficient for their purpose.

2
I. BACKGROUND

The following facts are drawn from the factual stipulations in the parties’ pre-

trial order, exhibits attached to the pleadings and pre-trial briefing, and argument

presented at a one-day paper trial held on August 21, 2023.1

A. Zendesk Announces An All-Stock Transaction With Momentive,
Prompting An Activist Campaign.

Prior to the Transaction, Zendesk was a publicly traded Delaware corporation

that offered software-as-a-service products related to customer support, sales, and

other customer communications. The Board consisted of ten directors, including a

lead independent director, Carl Bass, and Zendesk’s co-founder, CEO, and

Chairman of the Board, Mikkel Svane. Shelagh Glaser served as the Company’s

CFO and John Geschke served as Chief of Staff.

On October 28, 2021, Zendesk announced that it had entered into an

agreement to acquire Momentive Global Inc. (“Momentive”), formerly known as

SurveyMonkey, in an all-stock merger (the “Momentive Transaction”).2 The

Momentive Transaction, which valued Zendesk common stock at approximately

1
The Stipulation and Pre-Trial Order is cited as “PTO ¶ __”. Exhibits attached to
Plaintiffs’ Pre-Trial Brief (“PB”), Dkt. 33, are cited as “PX __”. Exhibits attached to
Defendant Zendesk, Inc.’s Pre-Trial Answering Brief (“DB”), Dkt. 49, are cited as “DX
__”.
2
PX 2, Zendesk, Inc., Proxy Statement (Schedule 14A) 28 (Aug. 8, 2022) [hereinafter,
“Proxy”].

3
$124 per share, drew criticism from Zendesk stockholders, including activist

investor JANA Partners (“JANA”). On November 30, 2021, JANA sent an open

letter to the Board opposing the Momentive Transaction and stating JANA’s intent

to vote against the issuance of Zendesk common stock required to consummate the

Momentive Transaction.3 On January 3, 2022, JANA sent another letter denouncing

the Board’s “inexplicabl[e]” decision to use an “artificially depressed stock price”

for Zendesk to acquire Momentive.4

B. The Board Rejects A Competing Proposal To Acquire Zendesk For
$127 To $132 Per Share.
On February 7, 2022, the Board received an unsolicited proposal from a

consortium of private equity firms, including Permira Advisors LLC and Hellman

& Friedman LLC (collectively, the “Consortium”), to acquire Zendesk for a price

between $127 and $132 per share in cash, subject to due diligence and other

conditions (the “February 7 Consortium Proposal”).5

On February 9, 2022, the Board held a meeting at which Goldman Sachs

(“Goldman”) and Centerview Partners (“Centerview”) made presentations to the

Board regarding the February 7 Consortium Proposal. The Board concluded that the

3
Id. at 28.
4
PX 16.
5
Proxy at 28.

4
February 7 Consortium Proposal “significantly undervalued Zendesk and that it was

not in the best interests of Zendesk and its stockholders to alter Zendesk’s existing

strategic plan and pursue the proposed transaction with the Consortium.”6 The next

day, Zendesk issued a press release announcing its receipt, review, and rejection of

the February 7 Consortium Proposal.7

C. Zendesk Stockholders Reject The Momentive Transaction.

On February 16, 2022, JANA sent another open letter to the Board opposing

the Momentive Transaction.8 JANA’s letter claimed that Zendesk’s “lengthy effort

to win support for the Momentive acquisition ha[d] been met by vociferous and

sustained rebuke,” and noted that proxy advisory firms ISS and Glass Lewis had

advised Zendesk stockholders to vote against the Momentive Transaction. 9 JANA

called for the Board to “be replaced with capable fiduciaries or reverse course and

engage with interested strategic and financial buyers to sell the Company,” and

declared its intent to nominate four director nominees for election to the Board at

Zendesk’s 2022 annual meeting.10 The same day, a Reuters article reported that an

anonymous “portfolio manager at a prominent mutual fund company” had stated “he

6
Id. at 29.
7
PTO ¶ 24.
8
Id. ¶ 26.
9
PX 5.
10
Id.

5
would support replacing board members and would also like to see management

replaced.”11

On February 25, 2022, Zendesk stockholders voted against the Momentive

Transaction, and Zendesk announced the termination of the Momentive

Transaction.12

D. JANA Continues To Press For A Sale Or Leadership Change.

On February 28, 2022, JANA sent another open letter to the Board, claiming

that the stockholder votes cast to approve the Momentive Transaction represented

“the lowest level of support of any disclosed deal-related shareholder vote (buyer or

seller) in the Russell 3000 in the last 20 years (and possibly ever).”13 JANA’s letter

criticized the Board for being “disengaged and totally out of touch with shareholder

priorities” and “lack[ing] the requisite skillset to govern the company,” and

demanded leadership changes or a sale of the Company.14

On March 7, 2022, the Board met with management and advisors at Qatalyst

Partners (“Qatalyst”) and Wachtell, Lipton, Rosen & Katz (“Wachtell”) to discuss

11
Svea Herbst-Bayliss, Jana Partners launches proxy fight at Zendesk, nominates four to
board, REUTERS (Feb. 16, 2022), https://www.reuters.com/business/finance/exclusive-
jana-partners-launches-proxy-fight-zendesk-nominates-four-board-2022-02-16/.
12
Proxy at 29.
13
PX 56.
14
Id.

6
the process for reviewing strategic alternatives and engagement with JANA.15 In

advance of that meeting, the Board received an 80-page presentation from Qatalyst

that summarized observations and recommendations regarding JANA’s proxy

fight.16 The presentation advised that “[i]nitial engagement [with JANA] should

focus on creating a record, drawing out specific ideas JANA has for enhancing

shareholder value and, if the Board decides to publicly announce strategic

alternatives, providing JANA with the opportunity to provide its perspectives on

potential interest/value thresholds,” and that “engagement regarding a potential

settlement should occur after the passage of some time, when there is more clarity

regarding the strategic alternatives process and/or progress has been made on

standalone alternatives.”17 The presentation also described JANA’s “ultimate” and

“secondary” objectives, provided an illustrative timeline for the proxy contest, and

summarized settlement considerations.18

E. The Board Amends Zendesk’s Equity Plan To Accelerate Unvested
Equity Grants In A Sale.

On March 14, 2022, the Board’s compensation committee met with Svane and

Geschke to discuss management retention “[s]hould the board elect to publicly

15
Proxy at 29-30.
16
PX 21.
17
Id.
18
Id.

7
announce the pursuit of a strategic review.”19 Materials for that meeting explain that

in the event of a sale, Zendesk’s equity incentive plan did “not mandate a specific

treatment of equity awards of Zendesk in a situation where an acquirer does not

assume the equity awards of Zendesk and decides to terminate the plan instead.”20

The compensation committee recommended “expressly provid[ing] for acceleration

for all employees in the event an acquirer does not assume outstanding equity

incentives.”21 On April 27, 2022, the Board approved amending Zendesk’s equity

plan for employees at the VP level and above.22

F. The Board Undertakes A Strategic Review While It Engages With
JANA.

On March 16, 2022, the Board commenced a process to review strategic

alternatives, and also “directed management to work with outside advisors to engage

with JANA in connection with the proxy contest.”23 During the strategic review,

Qatalyst contacted 26 potential counterparties, including 16 potential strategic

partners and ten potential financial sponsors.24

19
PX 23.
20
Id.
21
Id.
22
DX E at 48.
23
PX 24.
24
Proxy at 30.

8
On March 23, 2022, the Board met to discuss the status of the strategic review

and engagement with JANA.25 In advance of that meeting, the Board received a

presentation prepared by Qatalyst summarizing the Company’s engagement with

JANA and other stockholders, and detailing a “near-term engagement plan for

JANA.”26 The Board discussed “engagements that had taken place earlier in the

week” between Zendesk and JANA, including that management had reached out to

JANA to schedule a meeting and requested the opportunity for Zendesk’s outside

search firm to interview JANA’s director candidates, but JANA had refused.27 The

Board determined that Qatalyst would reach out to JANA the following week.28

On April 13, 2022, the Board “discussed and reviewed the potential proxy

contest with JANA Partners, and continued this discussion” at a Board meeting on

April 15, 2022,29 where it considered settlement scenarios with JANA, including “a

sale of the Company and a settlement with JANA, no sale of the Company and a

settlement with JANA, or no sale of the Company and a proxy contest decided at the

25
Id.
26
DX KK.
27
PX 25.
28
Shortly thereafter, the Board also received an April 4, 2022 document with detailed
“Talking Points and Q&A For Director Engagement with JANA.” DX LL.
29
Proxy at 31.

9
annual meeting of shareholders.”30 The Board discussed “the potential proxy contest

timeline and process,” including “key dates in the process, the key decisions that

would need to be made, and the legal and strategic context for those decisions.”31

An April 13, 2023 document titled “Post-JANA Debrief and Selected

Observations” provides additional detail on discussions with JANA, explaining that

Zendesk “participants generally led the dialogue” and the “[f]ocus of discussion was

on JANA’s demand for a sale of the company,” although “JANA reiterated its

commitment (absent a sale) to pursue board change.”32 The document further

explains that “JANA offered only high-level comments on opportunities for

improvement” and there was “[e]xtensive discussion regarding JANA’s value

expectations,” including that “JANA stated that it believes unaffected price is $100-

110/share,” “JANA offered some directional views regarding value expectations in

a sale, but did not offer a specific figure,” and “JANA stated that, if a

broad/comprehensive process was run, JANA believes that the price produced by

such a process would be a good indication of [Zendesk]’s value.”33

30
PX 29.
31
Id.
32
PX 28.
33
Id.

10
G. Zendesk Receives Two Indications Of Interest That Do Not Result
In A Financed Bid.
On May 5, 2022, Zendesk received an indication of interest from the

Consortium to acquire Zendesk common stock for $120 per share, and an indication

of interest from another potential counterparty, “Bidder 2,” to acquire Zendesk

common stock for $125 to $135 per share.34

Between May 4 and May 24, 2022, however, Zendesk’s stock price fell by

29%, from $123.65 to $88.18. On May 24, 2022, the Consortium informed Qatalyst

that it had lost several members of its bidding group due to concerns about Zendesk’s

business momentum and potentially worsening market conditions, and did not have

the financing necessary to submit a final proposal.35

On May 26, 2022, Bidder 2 informed the Company that “in light of declining

valuations of comparable companies, ongoing market uncertainty and deteriorating

business momentum of Zendesk, [it] would not be able to submit a proposal within

or close to their previously indicated range,” and that it might “be able to offer as

high as $110.00 per share of Zendesk common stock but would require several

additional weeks to secure the necessary equity financing.”36 On May 28, 2022, at

34
Proxy at 32.
35
Id. at 34.
36
Id.

11
the Board’s direction, Qatalyst informed Bidder 2 that it would need to improve its

proposal to $115 per share.37 On June 1, 2022, Bidder 2 informed Qatalyst that it

was not able to offer $115 per share and that even at a lower range, “deteriorating

market conditions and volatility were causing the internal processes for limited

partners to secure financing to be extended . . . .”38

H. The Company Concludes Its Strategic Review And Engages With
JANA About Board And Management Changes.
On June 6, 2022, the Board held two meetings at which it decided to terminate

the strategic review and continue to execute on the Company’s strategic plan as a

standalone company.39 The Board also considered an “illustrative proposal” for a

settlement between Zendesk and JANA prepared by Qatalyst.40 Qatalyst’s

presentation highlighted potential risks associated with JANA’s proxy contest,

including that JANA “may expand its demands beyond what it c[ould] achieve in a

proxy fight[,]” which could include “[m]ak[ing] commitments to changes in

management” and a “majority board change.”41

37
Id. at 35.
38
Id.
39
PX 33.
40
PX 34.
41
PX 35.

12
The Board determined to “seek to have discussions with JANA pursuant to a

short-term confidentiality agreement before making any public announcement with

respect to the strategic review process.”42 The next day, however, JANA informed

the Company that it would not sign a limited NDA,43 and on June 8, 2022, JANA

issued a press release announcing its intention to sue Zendesk to compel the

Company to schedule its 2022 annual meeting.44 On June 9, 2022, Zendesk publicly

announced that it had concluded its strategic review and would remain a standalone

company.45

Two days later, on June 11, 2022, the Board held a meeting at which it

“discussed feedback from JANA” following issuance of the June 9 press release and

“potential changes to the composition of the Board and the management team in

connection with a possible settlement with JANA.”46 In an executive session, the

Board agreed to “seek a settlement of the proxy contest with JANA and that

designated members of the Board, with representatives from Wachtell Lipton and

42
PX 34.
43
Proxy at 36.
44
Id.
45
Id.
46
PX 37.

13
Qatalyst, should have discussions with representatives of JANA with respect to the

terms of such a settlement.”47

On June 14, 2022, the Wall Street Journal reported that “Zendesk and JANA

[we]re discussing a truce that could involve Mikkel Svane stepping down as the

software company’s chief executive, as well as changes to the board, including the

removal of director Carl Bass[.]”48

The same day, the Consortium expressed its continued interest in a transaction

with Zendesk, “subject to receipt of additional due diligence, including on actual

results for gross and net bookings for May 2022 and an update on Zendesk’s overall

business momentum.”49 The Consortium indicated a proposal “could be as high as

$82.00 per share, if actual results for May 2022 were in line with their expectations

and subject to satisfactory responses to certain other confirmatory due diligence

items.”50

47
Id.
48
Dana Camiculla, Zendesk Is in Settlement Talks With Activist Investor Jana, WALL ST.
J. (June 14, 2022), https://www.wsj.com/articles/zendesk-is-in-settlement-talks-with-
activist-investor-jana-11655239833.
49
Proxy at 36.
50
Id. at 36-37.

14
On June 15, 2022, the Board discussed the potential terms of a settlement with

JANA.51 According to the June 15 minutes, the Company had “presented the

proposal previously approved by the Board to JANA and discussed JANA’s reaction

and responses on the key points of negotiation in a potential settlement, including

director appointments, committee assignments, potential management transition,

standstill restrictions on JANA, and issues related to the retention of Company

employees.”52

A June 17, 2022 draft settlement agreement reveals the terms of the potential

settlement discussed at the June 15 Board meeting. The draft contemplates that the

Board would remove Svane as CEO, initiate a process for identifying his successor,

“cause or accept the resignation of three (3) current directors of the Company from

the Board . . . two (2) from Class II and one (l) from Class I, as previously identified

to JANA,” and appoint two JANA nominees to fill the vacancies.53

I. Zendesk Receives A New Proposal From The Consortium, And
Management Adjusts Company Projections.

Also on June 17, 2022, the Company received a proposal from the Consortium

to acquire Zendesk for $75.50 per share (the “June 17 Consortium Proposal”).54 The

51
Id. at 37.
52
PX 38.
53
PX 39.
54
Proxy at 37.

15
Proxy states that “[d]uring a conversation with representatives of the Consortium,

such representatives indicated that they had lowered the price at which they were

willing to transact in light of the actual gross and net bookings results for May 2022,

which were weaker than they had expected, and the continued deterioration in

business momentum at Zendesk.”55

Following receipt of the June 17 Consortium Proposal, Zendesk and JANA

entered into a limited NDA which permitted Zendesk to disclose the June 17

Consortium Proposal to JANA.56 At a meeting with Zendesk on June 19, 2022,

JANA “expressed support for Zendesk being open to the proposed transaction and

attempting to engage with the Consortium in an effort to see if it were possible to

improve on the proposed price.”57

Later that day, the Board met to review the status of settlement discussions

with JANA and the June 17 Consortium Proposal.58 At the June 19 meeting,

members of Zendesk management discussed with the Board that it had updated

Zendesk’s long-range plan (the “June Projections”) to account for changes in

economic conditions, negative trends in gross and net bookings for Zendesk, and

55
Id.
56
Id.
57
Id.
58
Id. at 38.

16
deterioration in business momentum that deviated materially from the assumptions

underlying the projections prepared in March 2022.59

Between June 17 and June 23, 2022, Bidder 2 indicated that it would not

submit a proposal without seeing actual gross and net bookings data for June 2022

and assurances that business momentum was improving.60 Separately, on June 21,

2022, the Consortium submitted a “best and final” proposal to acquire Zendesk for

$77.50 per share (the “June 21 Consortium Proposal”).61 Qatalyst informed JANA

of the June 21 Consortium Proposal, and JANA advised that it would not oppose a

transaction at $77.50 per share and “would expect to terminate its proxy contest upon

announcement of such a transaction.”62

J. The Board Approves A Transaction With The Consortium For
$77.50 Per Share.

On June 22, 2022, the Board held a meeting at which management presented

the June Projections to the Board.63 Thereafter, the Board authorized its advisors to

move forward with finalizing proposed definitive agreements for a transaction

59
Id. Management created two sets of projections—a “Baseline” case and an “Upside
Opportunity” case. PX 44.
60
Proxy at 38.
61
Id.
62
Id. at 38-39.
63
Id. at 39.

17
through which the Consortium would acquire Zendesk for $77.50 per share of

common stock (the “Transaction”).64

On June 23, 2022, the Board met to consider whether to approve the

Transaction.65 Members of Zendesk management discussed the June Projections

and the Board approved their use by Zendesk’s financial advisors in connection with

their analyses of the Transaction.66 Qatalyst and Goldman each provided oral

fairness opinions, subsequently confirmed in writing, that the Transaction was fair,

from a financial point of view, to Zendesk common stockholders.67

The Board then recessed the meeting and Wachtell contacted JANA to

confirm whether JANA would agree to withdraw its nominations in light of the

Transaction. JANA confirmed its “willingness to agree to withdraw its director

nomination notice effective as of 5:00 p.m. on June 24, 2022 if Zendesk were to

announce an agreement for a sale of Zendesk at the $77.50 per share cash price no

later than the opening of market on June 24, 2022.”68 The Board then reconvened

and approved the Transaction.

64
Id.
65
Id.
66
Id.
67
Id. at 39-40.
68
Id. at 40.

18
K. The Board Rejects A Recapitalization Proposal From Light Street.

On August 28, 2022, Light Street Capital Management, LLC (“Light Street”)

sent a letter to the Board proposing a recapitalization transaction contemplating a

$2 billion preferred equity investment in the Company and a $2 billion debt facility

that would be used to conduct a $5 billion tender offer at $82.50 per share.69 In its

letter, Light Street claimed that “[t]here [wa]s no justifiable reason to sell the

Company at a price more than 40% below the offer initially rejected by the Board.”70

On August 31, 2022, the Board met and determined that Light Street’s proposal “did

not constitute and would not reasonably be expected to result in a superior

proposal.”71

L. The Transaction Closes.
On September 19, 2022, Zendesk stockholders voted to approve the

Transaction. The Transaction closed on November 22, 2022. One week later, on

December 1, 2022, Zendesk announced that Svane and Glaser had resigned from the

Company effective November 28 and December 1, 2022, respectively.72

69
PX 15.
70
Id.
71
PX 48; see also DX OO (Qatalyst presentation summarizing Light Street’s proposal).
72
PX 3.

19
M. The Demands

Between August 5 and September 7, 2022, eight stockholders served demands

on the Company pursuant to 8 Del. C. § 220 (collectively, the “Demands”), seeking

to inspect books and records of the Company. The stated purposes of each Demand

include the investigation of potential wrongdoing in connection with the

Transaction.

In response to the Demands, Zendesk voluntarily produced 335 documents,

totaling 5,281 pages, including Board minutes and other formal Board-level

documents concerning the Momentive Transaction, the Transaction, and JANA; bid

process letters and written offers; director questionnaires; advisor engagement

letters; reports from proxy advisory services; copies of Zendesk’s financial

projections and forecasts; and NDAs with potential acquirers (the “Production”).

Unsatisfied with that Production, on March 1, 2023, Plaintiffs’ counsel sent

Zendesk’s counsel a proposed protocol to govern the search and review of electronic

communications in response to the Demands.73 The protocol sought electronic

communications from seven custodians over a three-month period.74 Zendesk

declined to produce electronic communications in response to the Demands.

73
PX 10.
74
Id.

20
N. Procedural History

Between September 16 and September 19, 2022, three stockholder complaints

were filed in this Court to compel inspection of books and records pursuant to

Section 220.75 Those actions were voluntarily stayed to allow the parties to negotiate

a potential resolution of the Demands.

In addition, in September 2022, Zendesk and four stockholders entered into

“Standing Agreements” that contractually replicate the stockholders’ statutory rights

under Section 220 and prevent the Company from asserting that the closing of the

Transaction extinguished the stockholders’ standing to pursue books and records

pursuant to their Demands.76 On April 24, 2023, three of those four stockholders

filed a complaint to compel inspection of books and records pursuant to Section

220.77

On May 23, 2023, I entered a stipulation and order coordinating the four

actions, mandating that resolution of this coordinated action shall apply to all parties

(the “Coordination Order”). The Coordination Order also permitted other

75
See McGinnis v. Zendesk, Inc., C.A. No. 2022-0827-BWD (Del. Ch.); Police & Fire Ret.
Sys. of the City of Detroit v. Zendesk, Inc., C.A. No. 2022-0830-BWD (Del. Ch.);
Ongkowidjojo v. Zendesk, Inc., C.A. No. 2022-0833-BWD (Del. Ch.).
76
The parties have not briefed whether those stockholders are entitled to books and records
as a matter of contract or statutory entitlement (or both). The result is the same either way.
Amethyst Arbitrage Int’l Master Fund v. Zendesk, Inc., C.A. No. 2023-0454-BWD (Del.
77

Ch.).

21
stockholders who served Demands to join this action by filing a complaint or a notice

of appearance as an interested party on or before May 26, 2023. One additional

stockholder who is party to a Standing Agreement entered an appearance on May

24, 2023.

On June 26, 2023, Plaintiffs filed their Pre-Trial Brief, attaching as Exhibit 1

a new proposed search protocol to govern Plaintiffs’ requested inspection. That

protocol seeks electronic communications on three topics, proposing parameters

significantly broader than the ones sent to Zendesk’s counsel in March.78 Zendesk

filed its Pre-Trial Answering Brief on July 26, 2023.

A one-day trial on a paper record was held on August 21, 2023.79

II. ANALYSIS

“To inspect books and records under Section 220, a plaintiff must establish

by a preponderance of the evidence that the plaintiff is a stockholder, has complied

with the statutory form and manner requirements for making a demand, and has a

proper purpose for conducting the inspection.” Pettry v. Gilead Scis., Inc., 2020 WL

6870461, at *9 (Del. Ch. Nov. 24, 2020), judgment entered, (Del. Ch. 2020). “If a

stockholder meets these requirements, the stockholder must then establish ‘that each

78
PX 1.
79
Trial was initially scheduled for July 19, 2023, but was rescheduled to August 21, 2023
at the parties’ request.

22
category of the books and records requested is essential and sufficient to the

stockholder’s stated purpose.’” Id.

The parties agree that the Demands complied with the form and manner

requirements of Section 220. The parties dispute only whether Plaintiffs have

demonstrated a proper purpose to inspect books and records and, if so, whether they

are entitled to inspect electronic communications in response to the Demands.

A. Plaintiffs Have Demonstrated A Proper Purpose For Inspection.

“The paramount factor in determining whether a stockholder is entitled to

inspection of corporate books and records is the propriety of the stockholder’s

purpose in seeking such inspection.” CM & M Gp., Inc. v. Carroll, 453 A.2d 788,

792 (Del. 1982). “In a section 220 action, a stockholder has the burden of proof to

demonstrate a proper purpose by a preponderance of the evidence.” Seinfeld v.

Verizon Commc’ns, Inc., 909 A.2d 117, 121 (Del. 2006).

Plaintiffs here seek books and records to investigate potential wrongdoing in

connection with the Transaction. Under Delaware law, a stockholder’s desire to

investigate wrongdoing is a proper purpose. However, “[a] mere statement of a

purpose to investigate possible general mismanagement, without more, will not

entitle a shareholder to broad § 220 inspection relief.” Seinfeld, 909 A.2d at 122.

To establish a proper purpose of investigating wrongdoing, a stockholder “‘must

23
present some evidence to suggest a credible basis from which a court can infer that

. . . wrongdoing may have occurred.’” Pettry, 2020 WL 6870461, at *10.

The credible basis standard imposes “the lowest possible burden of proof.”

Seinfeld, 909 A.2d at 123. It does not require a stockholder to prove that the

wrongdoing “actually occurred.” Marmon v. Arbinet-Thexchange, Inc., 2004 WL

936512, at *4 (Del. Ch. Apr. 28, 2004). It does not require a stockholder “to show

by a preponderance of the evidence that wrongdoing is probable.” Lebanon Cnty.

Employees’ Ret. Fund v. Amerisourcebergen Corp., 2020 WL 132752, at *8 (Del.

Ch. Jan. 13, 2020), aff’d, 243 A.3d 417 (Del. 2020). It requires only that a

stockholder “establish by a preponderance of the evidence that there is a credible

basis to suspect a possibility of wrongdoing.” Pettry, 2020 WL 6870461, at *11

(emphasis in original). That burden may be “‘satisfied by a credible showing,

through documents, logic, testimony or otherwise, that there are legitimate issues of

wrongdoing.’” Id.

Plaintiffs have demonstrated a credible basis to suspect the possibility of

wrongdoing in connection with the Transaction. To meet their burden, Plaintiffs

point to facts showing that in February 2022, the Board rejected an acquisition

proposal for $127 to 132 per share because it “significantly undervalued” the

Company. Yet four months later, in June 2022, the Board approved a sale at $77.50

per share. In the intervening period, an activist investor launched a public campaign

24
seeking to replace the Board and management in the absence of a sale. Plaintiffs

have made a credible showing that the Board was prepared to agree to a settlement

with the activist that would have resulted in a potentially embarrassing public ouster

of the Company’s CEO and replacement of four of ten directors on the Board. But

the same day that settlement agreement was prepared, the Board received a new,

albeit lower, proposal to acquire the Company. In response, management

significantly cut the Company’s long-range forecasts and, based on those lowered

projections, the Board approved a sale at a price nearly 40% less than the offer it had

rejected four months earlier. Under the lowest possible burden of proof, those facts

in the aggregate establish a credible basis to investigate wrongdoing in connection

with the Transaction.

The Company pokes holes in Plaintiffs’ “entrenchment theory,” explaining

that “if the deal went through, Zendesk’s outside directors would be out of a job”

anyway, and “if the supposed scheme was to entrench Svane, it failed miserably,”

since he resigned one week after the deal closed.80 As I understand it, Plaintiffs

argue that management may have favored a sale to protect their positions—it is not

clear when Svane and Glaser decided to resign—or they may have favored a sale to

protect their reputations. Plaintiffs theorize that once it became apparent that the

80
DB at 29-30.

25
Board would accede to JANA’s demands, management was motivated to favor a

transaction that would either secure their continued employment or, alternatively,

permit them to exit the Company on their own terms with millions of dollars in

vested equity grants. Again, this satisfies Plaintiffs’ low burden to demonstrate a

credible basis to suspect wrongdoing.

The Company also raises several additional merits-based arguments to

challenge Plaintiffs’ showing of a credible basis. Zendesk contends the facts

presented here are unlike those in PLX81 or Xura,82 in which the Court sustained

breach of fiduciary duty claims arising from a merger approved in the face of activist

pressure, and more closely resemble Rudd v. Brown83 and Lukens,84 where similar

theories were rejected on the pleadings. Zendesk also argues that the Transaction

was approved by a majority of disinterested and independent directors, 85 Svane’s

equity interest in the Company incentivized him to get the best price in the deal,86

and the Board’s decision to sell the Company in June at a price lower than the

81
In re PLX Tech. Inc. S’holders Litig., C.A. No. 9880-VCL (Del. Ch. Sept. 3, 2015)
(TRANSCRIPT).
82
In re Xura, Inc., S’holder Litig., 2018 WL 6498677 (Del. Ch. Dec. 10, 2018).
83
Rudd v. Brown, 2020 WL 5494526 (Del. Ch. Sept. 11, 2020).
84
In re Lukens Inc. S’holders Litig., 757 A.2d 720 (Del. Ch. 1999), aff’d sub nom. Walker
v. Lukens, Inc., 757 A.2d 1278 (Del. 2000).
85
DB at 29, 32.
86
Id. at 31.

26
February proposal made sense in light of market conditions affecting cloud stocks

in 2022.87 “This Court has repeatedly stated that a Section 220 proceeding does not

warrant a trial on the merits of underlying claims.” In re UnitedHealth Grp., Inc.

Section 220 Litig., 2018 WL 1110849, at *7 (Del. Ch. Feb. 28, 2018), aff’d sub nom.

UnitedHealth Grp. Inc. v. Amalgamated Bank as Tr. for Longview Largecap 500

Index Fund, 196 A.3d 885 (Del. 2018).88 While Zendesk’s responses may carry the

day in plenary litigation, they do not, at this stage, undermine Plaintiffs’ showing of

a credible basis under the lowest possible burden of proof.

87
Id. at 34. Relying on City of Westland Police & Fire Retirement System v. Axcelis
Technologies, Inc., Zendesk asserts that “a precipitous drop in stock price” is insufficient
to support a credible basis to investigate wrongdoing. 2009 WL 3086537, at *8 (Del. Ch.
Sept. 28, 2009), aff’d, 1 A.3d 281 (Del. 2010). JANA’s public campaign to replace
management followed by management’s downward revision of projections distinguish
these facts from Axcelis.
88
See also AmerisourceBergen Corp. v. Lebanon Cnty. Emps.’ Ret. Fund, 243 A.3d 417,
437 (Del. 2020) (“[A] Section 220 proceeding ‘is not the time for a merits assessment of
Plaintiffs’ potential claims against [the corporation’s] fiduciaries.’”); Inter-Loc. Pension
Fund GCC/IBT v. Calgon Carbon Corp., 2019 WL 479082, at *13 (Del. Ch. Jan. 25, 2019)
(rejecting “merits contentions that are best reserved for any potential plenary litigation that
may follow the Demand”), aff’d, 237 A.3d 818 (Del. 2020); Lavin v. W. Corp., 2017 WL
6728702, at *9 (Del. Ch. Dec. 29, 2017), judgment entered, (Del. Ch. 2018) (“[W]hen a
stockholder demands inspection as a means to investigate wrongdoing in contemplation of
a class or derivative action, Delaware courts generally do not evaluate the viability of the
demand based on the likelihood that the stockholder will succeed in a plenary action.”);
Khanna v. Covad Commc’ns Grp., Inc., 2004 WL 187274, at *6 (Del. Ch. Jan. 23, 2004)
(rejecting the argument that “various transactions were approved by a majority of directors
whose independence and disinterestedness are not fairly questioned,” explaining that “[a]
Section 220 action is not the proper forum for litigating a breach of fiduciary duty case”
and “[a]ll that the Section 220 plaintiff must show is a credible basis for claiming that ‘there
are legitimate issues of wrongdoing’”).

27
B. Plaintiffs Have Not Established That Electronic Communications
Are Essential To Accomplishing Their Purpose.
Where a stockholder establishes a proper purpose for inspecting books and

records under Section 220, the Court must evaluate the scope of the request. “The

scope of inspection is a fact-specific inquiry, and the court has broad discretion when

conducting it.” Hightower v. SharpSpring, Inc., 2022 WL 3970155, at *8 (Del. Ch.

Aug. 31, 2022).

The stockholder plaintiff “‘bears the burden of proving that each category of

books and records is essential to accomplishment of the stockholder’s articulated

purpose for the inspection.’” KT4 Partners LLC v. Palantir Techs. Inc., 203 A.3d

738, 751 (Del. 2019). “Books and records satisfy this standard ‘if they address the

‘crux of the shareholder’s purpose’ and if that information ‘is unavailable from

another source.’’” Id. “Keeping in mind that § 220 inspections are not tantamount

to ‘comprehensive discovery,’ the Court of Chancery must tailor its order for

inspection to cover only those books and records that are ‘essential and sufficient to

the stockholder’s stated purpose.’ In other words, the court must give the petitioner

everything that is ‘essential,’ but stop at what is ‘sufficient.’” Id. at 751-52.

To determine which documents are necessary and essential to accomplish a

proper purpose, recent decisions have grouped requests for books and records into

three categories:

28
• “Formal Board Materials,” or “board-level documents that
formally evidence the directors’ deliberations and decisions and
comprise the materials that the directors formally received and
considered;”

• “Informal Board Materials,” which “generally will include
communications between directors and the corporation’s officers
and senior employees, such as information distributed to the
directors outside of formal channels, in between formal
meetings, or in connection with other types of board gatherings,”
and sometimes including “emails and other types of
communication sent among the directors themselves;” and

• “Officer-Level Materials,” which are “communications and
materials that were only shared among or reviewed by officers
and employees.”

Hightower, 2022 WL 3970155, at *9 (quoting Lebanon Cnty. Emps.’ Ret. Fund,

2020 WL 132752, at *25).

Formal Board Materials are the starting point—and typically the ending

point—for a sufficient inspection. Woods, Tr. of Avery L. Woods Tr. v. Sahara

Enters., Inc., 2020 WL 4200131, at *11 (Del. Ch. July 22, 2020). Decisions

considering requests for Informal Board Materials and/or Officer-Level Materials in

the form of emails “reflect the principle that the Court of Chancery should not order

emails to be produced when [Formal Board Materials] would accomplish the

petitioner’s proper purpose, but if non-email books and records are insufficient, then

the court should order emails to be produced.” KT4 Partners LLC, 203 A.3d at 752-

53. Whether Formal Board Materials are sufficient for a stockholder’s purposes is

fact dependent, but generally speaking, a broader inspection may be needed if the

29
Board did not honor traditional corporate formalities, the alleged wrongdoing

happened exclusively at the officer level, or the Formal Board Materials fail to

address key events. See Oklahoma Firefighters Pension & Ret. Sys. v. Amazon.com,

Inc., 2022 WL 1760618, at *12 (Del. Ch. June 1, 2022); Hightower, 2022 WL

3970155, at *10.

The Board here honored corporate formalities in the process leading to the

Transaction. Zendesk’s production of Formal Board Materials comprised 335

documents, totaling 5,281 pages, including Board meeting minutes and

presentations, bid process letters and written offers, director questionnaires,

projections and forecasts, and agreements with potential acquirers. In search of a

foothold to argue for an even broader inspection, however, Plaintiffs identify

supposed “gaps” and “inconsistencies” in the Formal Board Materials. According

to Plaintiffs, these deficiencies require production of: (1) electronic communications

from seven custodians over a five-month period regarding the Board’s negotiations

with JANA; (2) electronic communications from five custodians over a ten-month

period regarding director and officer retention and compensation; and (3) electronic

communications from four custodians over an eight-month period regarding “the

actual and projected financial performance of Zendesk.”89

89
PX 1.

30
As explained below, Plaintiffs have not met their burden to prove that

electronic communications concerning any of these topics are essential to

accomplishing the proper purposes stated in their Demands.

1. Negotiations With JANA
Plaintiffs first seek electronic communications concerning Zendesk’s

negotiations with JANA. According to Plaintiffs, the Formal Board Materials on

this topic contain “material gaps” and “inconsistencies,” such that the “Production

fails to answer basic questions about how th[e] settlement with JANA evolved, fell

apart, or affected the Board’s deliberation about the Transaction.”90 Plaintiffs have

not met their burden to establish that electronic communications concerning JANA

are essential to their investigation purpose.

Plaintiffs have already received documents sufficient to investigate the

Board’s discussions with JANA. Indeed, documents in the Production address

Zendesk’s negotiations with JANA in far more detail than Plaintiffs’ briefing

suggests. For example, in early March 2022, the Board received an 80-page

presentation from Qatalyst advising on engagement with JANA, detailing objectives

for JANA’s proxy contest, providing an illustrative timeline for the proxy contest,

90
PB at 50.

31
and summarizing various settlement considerations.91 Shortly thereafter, in

connection with a March 23, 2022 meeting, the Board received another presentation

from Qatalyst summarizing the Company’s engagement with JANA and detailing a

“near-term engagement plan for JANA” that identified the parties involved,

proposed timing, key messaging, and the rationale for each aspect of the proposed

plan.92 Around the same time, the Board received a document titled “Project Zenith:

JANA Engagement Plan,” which scripted proposed messaging to JANA in four

phases and outlined illustrative responses to potential demands that JANA might

make.93 The Board received an April 4, 2022 document outlining “Talking Points

and Q&A For Director Engagement with JANA” in detail,94 and an April 13, 2022

document providing a “Post-JANA Debrief and Selected Observations” with

additional updates on discussions with JANA.95 In June 2022, the Board received a

presentation outlining “Considerations Regarding Next Steps with JANA Partners,”

including an overview of potential risks associated with JANA’s proxy contest.96

And the Production also includes the June 17, 2022 draft settlement agreement,

91
PX 21.
92
DX KK.
93
DX JJ.
94
DX LL.
95
PX 28.
96
PX 35.

32
which reflects the terms that the Board was prepared to accept in a potential

settlement with JANA.97 To be sure, Plaintiffs still have questions, but the

suggestion that the Formal Board Materials “fail to answer basic questions” about

the Board’s engagement with JANA mischaracterizes the record. See Frank v. Nat’l

Holdings Corp., C.A. No. 2021-0160-MTZ, at 15-16 (Del. Ch. July 22, 2022)

(TRANSCRIPT) (“[Plaintiff’s] position is that so long as he has questions that are left

unanswered, or rocks he has not overturned, he is entitled to more. That is not our

law, particularly in the context of board and management communications.”).

Despite the detailed information in the Production addressing Zendesk’s

engagement with JANA, Plaintiffs contend there are still “material gaps” in the

Production necessitating email review. As one example, Plaintiffs claim that a

March 30, 2022 Qatalyst presentation “has a bullet titled ‘JANA engagement

update,’ but neither the presentation nor the minutes provide the substance of

Qatalyst’s conversations with JANA or Qatalyst’s overview to the Board about those

conversations.”98 But the March 30, 2022 Board minutes explain that Qatalyst

“provided an overview of [its] recent conversation with JANA, including JANA’s

overall tone and the topics and questions raised by JANA, including as to the

97
PX 39.
98
PB at 48 (citing PX 27).

33
potential timing of the Company’s annual meeting.”99 The minutes are not

transcripts—they do not need to be—but this description provides sufficient detail

to orient Plaintiffs as to what was discussed. As another example, Plaintiffs suggest

that “none of the materials produced illuminate the substance of the Board’s

discussions of the settlement scenarios” contemplated at an April 15, 2022 Board

meeting.100 In fact, the April 15, 2022 Board minutes explain that “[t]he scenarios

discussed included a sale of the Company and a settlement with JANA, no sale of

the Company and a settlement with JANA, or no sale of the Company and a proxy

contest decided at the annual meeting of shareholders,” and that the Board agreed it

“should continue to engage with potential director candidates who might be added

to the Board, including as part of a settlement with JANA or as part of a Board

nominated slate in the event of a proxy contest with JANA.”101 Again, this provides

sufficient information to understand what the Board considered and concluded.

Plaintiffs’ characterizations of other Board meeting minutes as “nondescript” and

“largely redacted” are similarly off base.102

99
PX 26 (emphasis added).
100
PB at 48.
101
PX 29.
102
See PB at 49-50.

34
Plaintiffs also identify what they claim are “inconsistencies” between the

Production and the Proxy. Many of Plaintiffs’ examples are not actually

inconsistencies, but instances in which the produced documents provide more detail

than the Proxy.103 Others are nitpicky.104 In light of the extensive information

already provided in the Formal Board Materials, none support production of

electronic communications.

2. Director And Officer Retention And Compensation

Plaintiffs also seek electronic communications concerning “director and

officer retention and compensation.”105 Of Plaintiffs’ three requests, this is the most

amorphous. Although Plaintiffs already have sufficient information to understand

the financial incentives of Zendesk’s directors and officers in the Transaction,

Plaintiffs seek emails evidencing whether Zendesk’s fiduciaries were motivated by

those incentives to proceed with the Transaction. In large part, Plaintiffs rely on

103
See id. at 51 (“[U]nlike the internal notes, the Proxy does not mention that JANA valued
the Company on a standalone unaffected basis at over $100 per share.”); id. (“[T]he Proxy
does not disclose that the Company sent a draft settlement agreement to JANA between
June 17 and June 19 or that the agreement would have required Svane to step down as
Zendesk’s CEO.”). See also, e.g., id. at 10-11, 13-15, 17, 21, 23, 25-27 (pointing out details
from Formal Board Materials that are not included in the Proxy).
104
See id. at 51 (“The Proxy states that two members of the Board and ‘members [plural]
of Zendesk management’ were present, but internal notes state that two Board members
and only one member of Company management attended that JANA meeting.”); id.
(claiming “the Company’s internal documents reverse the supposed order of JANA’s
priorities”).
105
Id. at 53.

35
Inter-Local Pension Fund GCC/IBT v. Calgon Carbon Corp.106 to carry their

burden. It does not work.

The Proxy and the Production include the information necessary and essential

to investigate the financial incentives of Zendesk’s directors and officers. The Proxy

describes in detail the “Interests of Zendesk’s Executive Officers and Directors in

the Merger,” including with respect to the treatment of outstanding equity awards,

vesting of unvested stock options and stock-based awards upon termination after the

merger, severance benefits, and equity retention grants for certain executive

officers.107 The Proxy also includes a table summarizing the compensation Zendesk

executive officers would receive if they were terminated without cause or resigned

for good reason after the merger closed.108 Further, the Production includes

materials for the March 14, 2022 Zendesk compensation committee meeting at

which the committee recommended amending Zendesk’s equity incentive plan to

provide for acceleration of unvested equity awards in the event of a sale,109 as well

106
2019 WL 479082 (Del. Ch. Jan. 25, 2019), aff’d, 237 A.3d 818 (Del. 2020).
107
Proxy at 65-70. See also PB at 8 (“Svane received over $6.5 million through the
conversion of his unvested RSUs to cash as a result of the Transaction.”); id. at 7 n.16
(“Glaser received $1.5 million in the form of a ‘Retention Grant,’ . . . which partially offset
the loss of $3,467,289 worth of options . . . that expired worthless based on the
Consortium’s buyout price of $77.50.”).
108
Proxy at 70.
109
PX 23.

36
as minutes and resolutions of the June 23, 2022 Board meeting at which the Board

approved a retention equity award plan and severance program.110

Although Plaintiffs have what they need to understand the financial incentives

in the Transaction, they rely on Calgon to argue that electronic communications are

necessary to investigate “whether and to what extent members of Zendesk

management were motivated by their personal incentives in deciding to proceed with

the Transaction.”111 In that case, the Court found that the stockholder seeking to

investigate whether “management prioritized their own retention and compensation

over the interests of . . . stockholders” had met its burden to prove that it was

“unlikely to uncover any meaningful answers in more traditional, formal books and

records . . . .” Calgon, 2019 WL 479082, at *18. But “[i]n Calgon, which predates

AmerisourceBergen and Palantir, the defendant had refused to produce any

documents before trial, so the stockholder did not have the opportunity to review or

rely on formal board materials in support of its investigative purposes.” Frank, C.A.

No. 2021-0160-MTZ, Tr. at 20.112 If Calgon had voluntarily produced Formal Board

110
PX 52; DX MM.
111
PB at 54.
112
See also Jacob v. Bloom Energy Corp., 2021 WL 733438, at *9 (Del. Ch. Feb. 25, 2021),
judgment entered, (Del. Ch. 2021) (“[U]nlike in Calgon, where the record revealed the
target company did not maintain formal board-level documents reflecting its decision-

37
Materials like Zendesk did here, it might have obviated the need to produce

electronic communications.

Plaintiffs also contend that the Production “leaves critical questions about

retention and compensation issues unanswered.”113 For example, Plaintiffs ask

“[w]hat issues related to the ‘potential management transition’ and ‘retention of

Company employees’ . . . the Board discuss[ed] at its undocumented executive

sessions,” but a description of discussions during executive sessions is not likely to

be found in email.114 Plaintiffs speculate that “retention and compensation” issues

might “explain[] the Board’s knee-jerk rejection of Light Street’s proposal,”115 but

the Formal Board Materials fully describe the Board’s response to Light Street’s

proposal.116 And Plaintiffs question whether “the Consortium ma[d]e an affirmative

decision to compensate Svane for his unvested RSUs, or [if] Svane and/or the

Company proposed that compensation,” but the Proxy confirms that Svane was

entitled to 100% of his unvested equity awards in the event of a sale resulting in his

making, no such evidence was presented here with respect to Bloom’s Board. Thus, Jacob
failed to carry his burden to prove that emails and other electronic communications among
Company fiduciaries are necessary and essential to fulfill his investigative purpose.”).
113
PB at 55.
114
Id.
115
Id. at 56.
116
See DX P; DX NN; PX 49; DX OO.

38
termination without cause or resignation with good reason.117 In short, none of

Plaintiffs’ questions support the broad email searches they have requested.

3. Zendesk’s Financial Performance
Finally, Plaintiffs seek electronic communications concerning Zendesk’s

financial performance. To support this request, Plaintiffs assert that the Production

“does not account for the Company’s financial health in a way that justifies the

revised [June] Projections or the price paid in the Transaction”118 and

“is devoid of information that could even conceivably explain how the $127-$132

per share offer ‘significantly undervalued’ Zendesk in February but the $77.50 per

share offer four months later did not.”119 Even if Plaintiffs are not convinced that

the financial information produced “justifies” the Transaction, Plaintiffs already

have (with one exception) all documents necessary and essential to evaluate

Zendesk’s financial performance in connection with the Transaction.

First, Plaintiffs contend that the Production fails to adequately explain the

Board’s consideration of alternative proposals. For example, Plaintiffs say the

117
Proxy at 67. Plaintiffs also contrast language in a draft “employee Q&A,” which stated
“[t]here are no immediate changes contemplated for the management team,” with a revised
version stating that Zendesk did not “anticipate any changes to management as a result of
this acquisition.” PB at 56. The change is immaterial and does not support the production
of electronic communications.
118
PB at 57.
119
Id.

39
Production lacks “any formal assessment or accounting of the Company’s

operational and financial health as of February 2022, when the Company rejected

the $127-$132 per share offer from the Consortium.”120 But as Plaintiffs concede,

“the February 9[, 2022] meeting minutes show that the Board relied on Goldman’s

prior valuation that was prepared ‘in connection with the proposed Momentive

[Transaction] . . . .”121 Plaintiffs have that valuation,122 as well as discussion

materials prepared by Centerview for the February 9, 2022 meeting.123 Similarly,

Plaintiffs suggest that the Production contains “no explanation” for why the Board

rejected Light Street’s proposal. It does. The Production contains a 22-page

presentation from Qatalyst summarizing the Light Street proposal and key issues to

consider, with supporting valuation information.124

Plaintiffs complain that the valuations on which the Board relied do not

“justify” the Board’s responses. This argument misstates the standard. While a

books and records production should be sufficient to answer “the who, what, where,

when, and why of the possible wrongdoing,”125 the documents produced need not

120
Id.
121
Id. at 57-58.
122
DX TT.
123
PX 19.
124
DX OO.
125
Hightower, 2022 WL 3970155, at *9.

40
“justify” the merits of the Board’s decision-making to the stockholder plaintiffs’

satisfaction. Here, the documents in Plaintiffs’ possession are sufficient to

understand and evaluate the Board’s response to alternative proposals. That is what

the case law requires.

Second, Plaintiffs request monthly bookings figures. The Proxy explains that:

(1) the Consortium decreased its offer on June 17 based on “actual gross and net

bookings for May 2022, which indicated weaker business momentum than in prior

months, as well as an updated view of expected gross and net bookings for June

2022”126; (2) Zendesk management prepared the June Projections to take into

account, among other things, “below-expectation actual gross and net bookings for

the months of April and May 2022”127; and (3) in considering the value offered in

the Transaction relative to Zendesk’s standalone prospects, the Board considered

actual gross bookings for April and May 2022.128 Despite the Proxy’s repeated

126
Proxy at 37.
127
Id. at 62-63.
128
See id. at 41 (explaining that the Board considered, in the month of April 2022, “actual
gross bookings of $34.6 million, which represented a year-over-year decline of 7% and fell
below the internal outlook of $42.7 million by 19%, and net bookings of $16.5 million,
which represented a year-over-year decline of approximately 13% and fell below the
internal outlook of $20.8 million by 20%,” and in the month of May 2022, “actual gross
bookings of $35.7 million, which represented a year-over-year decline of approximately
16% and fell below the internal outlook of $51.6 million by 31%, and net bookings of $16.8
million, which represented a year-over-year decline of approximately 36% and fell below
the internal outlook of $32.2 million by 48%”).

41
reference to the monthly bookings on which bidders, management, and the Board

relied, the Production contains only quarterly bookings. Plaintiffs have established

that monthly bookings for April, May, and June 2022 are necessary for their

investigation purpose.

Finally, Plaintiffs assert that “the formal documents produced to date fail to

show how or why the final projections used by Zendesk to purportedly justify the

Transaction were prepared and selected.”129 Not so. Minutes in the Production

explain that on June 19, 2023, Zendesk management informed the Board that they

“were currently updating the Company’s long-range plan to account for the

significant changes in economic conditions and negative trends in gross and net

bookings for the Company and deterioration in business momentum that deviated

materially from the assumptions underlying prior expectations.”130 The final June

Projections were presented to the Board in advance of the June 22, 2023 meeting,

during which Glaser presented the updated projections “in light of the evolving

129
PB at 59.
130
PX 41. The Proxy similarly explains that “in the context of evaluating the Consortium’s
proposals, Zendesk management updated the March 2022 Case to take into account
changes in the internal and external business environment, including negative trends in
gross and net bookings momentum, below-expectation actual gross and net bookings for
the months of April and May 2022, challenges to Zendesk’s performance resulting from
elevated levels of attrition in critical sales functions and employee distraction as well as
significant changes in economic conditions facing Zendesk and its industry more generally,
including increased risk of recession, persistent high inflation and the impact of
macroeconomic headwinds on Zendesk’s customer segments . . . .” Proxy at 62-63.

42
market conditions, including the increased risk of recession, high inflation, impacts

on customer segments and a decrease in actual gross and net bookings and increased

churn and contraction, as well as challenges to the Company’s performance resulting

from elevated levels of attrition in critical sales functions, employee distraction, and

a reduction in investment growth.”131 The Board then authorized its advisors to

move forward with finalizing definitive agreements for a transaction through which

the Consortium would acquire Zendesk for $77.50 per share.132 Minutes of the June

23, 2023 Board meeting reflect the Board’s approval of the June Projections.133

Plaintiffs also have the June Projections134 and quarterly bookings figures, and

should receive the monthly bookings for April, May, and June 2022.

According to Plaintiffs, these explanations still “raise more questions than

they answer.”135 Plaintiffs point out that Zendesk’s financial condition did not

materially change between June 6, 2022, when the Board terminated the strategic

review, and June 23, 2022, when the Transaction was approved. Plaintiffs also note

that the Board did not direct management to prepare the June Projections in the first

131
PX 42.
132
Id.
133
PX 52.
134
PX 45; PX 51.
135
PB at 62.

43
instance, the Board formally approved the June Projections at the same meeting it

approved the Transaction, and the Company’s financial advisors did not rely on the

“Upside Opportunity” case in preparing the financial analyses underlying their

fairness opinions, notwithstanding that the Company had already undertaken some

efforts contemplated by the higher set of projections.136

Rather than undermine the sufficiency of the Production, these arguments

confirm that the documents already in Plaintiffs’ possession are sufficient to

understand and evaluate the Board’s process and “effectively address the problem”

(if there is one) through litigation. Saito v. McKesson HBOC, Inc., 806 A.2d 113,

115 (Del. 2002). While incremental details could be helpful to flesh out Plaintiffs’

theories, that does not support Plaintiffs’ request for “comprehensive,”137 discovery-

style email production through a books and records action.138

136
Id. at 62-63.
137
See KT4 Partners LLC, 203 A.3d at 751 (explaining that Section “220 inspections are
not tantamount to ‘comprehensive discovery’”).
138
See id. at 755 (noting that Section 220 contemplates the production of a “discrete set of
books and records” that is “much less extensive than would likely be produced in discovery
under the standards of Rule 26 in a plenary suit”); Saito, 806 A.2d at 114 (“[Section 220]
does not open the door to the wide ranging discovery that would be available in support of
litigation”).

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III. CONCLUSION

For the reasons explained above, I recommend that judgment be entered for

Plaintiffs to the extent that they seek monthly bookings figures for April, May, and

June 2022, and for Zendesk as to all other requests. The parties should meet and

confer regarding a form of implementing order within five days of this final report

becoming an order of the Court. This is a final report and exceptions may be taken

pursuant to Court of Chancery Rule 144(d)(2). The stay of exceptions entered under

the Chancellor’s May 5, 2023 assignment letter is hereby lifted.

45