Schoon v. Troy Corporation, download file.  This Chancery Court case involved an issue that remained after a trial pursuant to Section 220 involving the competing terms of a proposed Confidentiality Agreement. The court, as required by Section 220 the DGCL, attempted to balance the right of a stockholder to find a buyer for its shares with the legitimate interest of the company in protecting its competitive position by the disclosure of confidential financial and operating information to its principle creditors or competitors who were among the most likely potential buyers. 

A Section 220 case was filed because even though access to books and records was made available at the corporate headquarters because the parties could not agree on the terms of a Confidentiality Agreement . Although the court recognized its ability under Section 220 of the DGCL to impose restrictions to protect the corporation from having stockholders divulge confidential information to creditors and others, after trial in this case, the court determined that the demands of Troy for the terms of a Confidentiality Agreement were unreasonable. 

The court emphasized that the terms of a Shareholders Agreement did not restrict rights under Section 220 because such an attempted restriction on the statutory rights  in Section 220 would have had to expressly and clearly and affirmatively express such a waiver of rights under Section 220.

The court also found that evidence at trial supported the conclusion that the stockholder had a proper purpose to inspect the corporate books and records of Troy, i.e., to value the shares and to negotiate the sale of stock to a third party.

 Documents needed to value one’s shares in order to facilitate a sale is well established as a proper purpose under Section 220. The court also found after trial that the corporation did not establish that the shareholder had improperly shared confidential information in the past to competitors and held that it was entitled to share that information with bona fide prospective purchasers pursuant to a reasonable confidentiality order. (Parenthetically it should be noted that Section 220 specifically imposes the burden on the corporation when the shareholder list alone is requested. ) The court was aware of the need to balance the right to inspection of the stockholder with the legitimate interest of the corporation to safeguard its highly confidential information from competitors. 

The court found that there was no basis in Delaware law for an absolute restriction that prevented financial statements or any data derived therefrom or any valuation of the corporate stock to be given to a competitor. The court also found unreasonable a provision in the proposed confidentiality order by the corporation of a $5 million liquidated damages penalty. The court also allowed for other procedures to ensure that the recipient of company data was a bona fide prospective purchaser.

UPDATE: The court granted in part a motion for reconsideration to the extent that due to a settlement after trial, and before the decision was issued, and thus due to mootness, the decision would not have any res judicata effect. Read letter opinion on motion  here.