Securities Regulation Daily Books and records inspections aren’t entitled to presumption of confidentiality
Thursday, August 8, 2019

Books and records inspections aren’t entitled to presumption of confidentiality

By Anne Sherry, J.D.

In a blow to corporations responding to books-and-records requests, the Delaware Supreme Court held that Section 220 inspections of corporate records are not subject to a presumption of confidentiality.

Delaware’s high court has held that there is no presumption of confidentiality when a corporation turns over books and records for a stockholder’s inspection under Section 220 of the Delaware General Corporation Law. The Supreme Court also held that if the Chancery Court does enter a confidentiality order, the duration of the order does not depend on the shareholder’s ability to demonstrate exigent circumstances (Tiger v. Boast Apparel, Inc., August 7, 2019, Traynor, G.).

The case concerns a dispute between former founders of the reboot of an apparel brand, Boast. Over a period of several years, one of the founders requested books and records under Section 220, but the corporation requested confidentiality. When negotiations over the proposed confidentiality agreement failed, the requestor filed a Section 220 action in the Chancery Court. Concluding that there is a presumption that Section 220 productions be subject to confidentiality, the Chancery Court ordered an indefinite confidentiality period lasting until the plaintiff filed suit based on facts he learned in the inspection, after which applicable court rules would govern confidentiality.

The phantom presumption. While the Supreme Court affirmed the order and judgment of the Chancery Court, it disagreed with the vice chancellor’s references to a presumption of confidentiality. As the high court explained, the genesis of this concept was a 2004 Chancery Court opinion in which a Disney stockholder objected to Disney’s designation of certain documents as confidential. The Disney court invoked a presumption that production under a Section 220 demand is conditioned on a reasonable confidentiality order, citing a case that made no mention of such a presumption. The stockholder appealed, the high court remanded, and the Chancery Court retreated from its earlier position that there was a presumption of confidentiality. However, the idea stuck. Several recent Chancery decisions have applied the phantom presumption, although other cases refer to the custom, rather than presumption, of confidentiality.

Although the Supreme Court affirmed the vice chancellor’s order in the Boast case, it did so while clarifying that there is no presumption of confidentiality in Section 220 productions. Chancery retains the discretion to impose confidentiality restrictions, and corporations asked to produce nonpublic information will often be able to demonstrate the need for some degree of confidentiality. But rather than applying a presumption, Chancery must assess and compare the costs and benefits when determining the degree and duration of confidentiality.

The high court also disclaimed Chancery’s statement that the stockholder needed to suggest exigent circumstances to receive anything less than confidentiality of indefinite duration. Given there was no presumption of confidentiality at all, the court reasoned, there is no presumption of indefinite confidentiality. An indefinite period of confidentiality should be the exception, not the rule, and a party making a Section 220 demand need not show exigent circumstances.

No reversible error. Despite its disagreements with the Chancery Court’s statements, the high court did not find that the references to presumptions and exigent circumstances warranted reversal. While it was theoretically possible that an indefinite confidentiality order could unfairly burden an inspecting stockholder, the plaintiff did not show this was reasonably probable in his particular case. Chancery’s confidentiality order permits the plaintiff to share the documents with professionals for purposes of valuing his shares, as long as those professionals maintain confidentiality. The Chancery Court also did not err by crediting the corporation’s concern about improper use of books and records over the plaintiff’s concern about interference with his work.

The case is No. 23, 2019.

Attorneys: David A. Felice (Bailey & Glasser LLP) for Alex Tiger. Kevin G. Abrams (Abrams & Bayliss LLP) for Boast Apparel, Inc. a/k/a Bai Capital Holdings, Inc.

Companies: Boast Apparel, Inc. a/k/a Bai Capital Holdings, Inc.

MainStory: TopStory CorporateGovernance CorpGovNews GCNNews DelawareNews

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