The Delaware Supreme Court recently announced a decision of great importance for stockholder demands under Section 220 of the Delaware General Corporation Law. In Tiger v. Boast Apparel, Inc., No. 23, 2019 (Del. Supr. Aug. 7, 2019), the Delaware Supreme Court ruled that:
(i) although inspection of records demanded by stockholders pursuant to Section 220 is typically conditioned on a confidentiality order, or stipulation or agreement, such inspections are “not subject to a presumption of confidentiality”;
(ii) when the court, in the exercise of its discretion, enters a confidentiality order, an indefinite period of confidentiality protection should be the exception and not the rule; and
(iii) a party demanding books and records need not show exigent circumstances for a court to grant something less than indefinite confidentiality, under Section 220.
Regular readers familiar with the voluminous highlights on these pages of Section 220 cases over the last 14 years, are aware that despite the relative simplicity of the statute, pursuing rights under Section 220 requires stamina and patience and financial wherewithal.
This case involved an initial demand in December 2014 for books and records pursuant to Section 220. The primary dispute related to the scope and duration of a confidentiality agreement that the company required. A second demand under Section 220 was sent in February of 2017, and again the parties could not reach an agreement over the terms of a confidentiality agreement. In October 2017, a complaint was filed in the Court of Chancery demanding access to books and records based on a demand amended in May 2017. The primary dispute between the parties continued to be the scope of the confidentiality obligations imposed by the company on its production. Although the stockholder also requested non-confidential records, the company demurred.
A Master in Chancery submitted a report in July 2018 recommending indefinite confidentiality until such time as the stockholder filed a suit based on the inspection, after which confidentiality would be controlled by the applicable court rules. This appeal followed the finality of the Master’s Report.
Highlights of Court’s Ruling:
- Although the court disagreed with the reasoning of the Court of Chancery, it affirmed the decision because even though the Supreme Court would have employed different reasoning, there was no abuse of discretion or reversible error with the result.
- The Supreme Court clarified that there is no presumption of confidentiality in productions of data pursuant to Section 220.
- Although a corporation need not show specific harm that would result from disclosure before receiving confidentiality treatment in a Section 220 case, Delaware’s High Court explained that: “One cannot conclude reflexively that the need for confidentiality is readily apparent.”
- The Court ruled that: (i) An indefinite period of confidentiality protection should be the exception and not the rule; (ii) A party demanding Section 220 books and records need show exigent circumstances for a court to grant something less than an indefinite confidentiality.
- Although the Supreme Court disagreed with Chancery’s grant of indefinite confidentiality restrictions until a suit was filed, the stockholder did not make an adequate showing of reversible error.
In sum, this decision can be added to the extensive list of examples of Section 220 cases that have been lengthy and expensive for the stockholder to pursue to a final adjudication in the court of last resort in Delaware. Although the Delaware case law is well-established that stockholders should employ Section 220 before filing a plenary complaint, that effort–in the end–is not always satisfying.