Confidentiality and Inspections of
Corporate Books and Records
Posted by Justin T. Kelton, Abrams,
Fensterman, Fensterman, Eisman, Formato, Ferrara, Wolf & Carone, LLP,
on Sunday, September 1, 2019
|
Editor’s Note:
Justin T. Kelton is a
Partner at Abrams, Fensterman, Fensterman, Eisman, Formato,
Ferrara, Wolf & Carone, LLP. This post is based on an Abrams
Fensterman memorandum by Mr. Kelton and
is part of the Delaware
law series; links to
other posts in the series are available
here. |
In Tiger v. Boast Apparel, Inc.,
— A.3d —, 2019 WL 3683525 (Del. Aug. 7, 2019), the Delaware Supreme
Court recently ruled on an issue of first impression: whether Section
220 inspections of corporate books and records are presumptively
subject to confidentiality orders. The Court’s decision, which
reverses a recent line of cases that found a presumption of
confidentiality, may significantly impact Section 220 demands and
subsequent litigation arising from these proceedings.
Background and the Chancery Court’s Decision
In Tiger, the
plaintiff delivered a Section 220 demand to the defendant, the stated purposes
of which were to “value his shares, investigate potential mismanagement, and
investigate director independence.” Id. at *2. The defendant responded
by proposing a confidentiality agreement that would have barred the plaintiff
from using the documents in subsequent litigation. The parties negotiated over
the proposed confidentiality terms, but were unable to reach an agreement.
Id. The plaintiff then filed a Section 220 action, and the Court of
Chancery was called upon to decide the scope of the parties’ confidentiality
obligations. Id. The Chancery court ordered “an indefinite
confidentiality period lasting up to and until [the plaintiff] filed suit based
on facts learned through his inspection, after which confidentiality would be
controlled by the applicable court rules.” Id. The plaintiff appealed
to the Delaware Supreme Court.
The Delaware Supreme Court
Holds That Section 220 Demands Are Not Subject To A Presumption of
Confidentiality.
The Delaware Supreme
Court began its analysis by noting that the Court of Chancery is “empowered to
place reasonable confidentiality restrictions on a Section 220 production.”
Id. (citing CM & M Group, Inc. v. Carroll, 453 A.2d 788 (Del.
1982)).
The Court then analyzed
both the Court of Chancery’s and its own holdings in Disney v. Walt Disney
Co., which has been the basis for a recent string of cases finding a
presumption of confidentiality in Section 220 actions. In Disney, the
parties had executed a confidentiality agreement, and the plaintiff subsequently
petitioned the Court of Chancery to lift the confidentiality conditions for
certain documents. The Court of Chancery “beg[an] its analysis with the
presumption that . . . a demand pursuant to Section 220 should be conditioned
upon a reasonable confidentiality order.” Id. at *3. The Court of
Chancery denied the plaintiff’s request, and he appealed to the Delaware Supreme
Court, which remanded the case with an instruction to make specific findings
about whether the documents were confidential. On remand, the Court of Chancery
“recast its mode of inquiry, retreating from its earlier position that there is
a presumption of confidentiality.” Id. (emphasis in original).
Rather, the Court of Chancery stated that “a demand pursuant to Section 220 will
normally be conditioned upon a reasonable confidentiality order.”
Id. (emphasis in original).
After analyzing the
Disney decisions, the Court found that there is no presumption of
confidentiality. Id. at *4. In so holding, the Court found that recent
decisions had misapplied the prior decisions in Disney:
Although on remand the
Court of Chancery in Disney essentially disclaimed a presumption of
confidentiality, its original 2004 statement touting a presumption has, directly
and indirectly, become the basis for several recent Court of Chancery decisions
applying just such a presumption. And here the Master’s Report followed suit,
paraphrasing a corporate law treatise, quoting only from the Court of Chancery’s
original Disney decision, and concluding that there is a presumption of
confidentiality.
Id. Therefore,
the Court decided to resolve the apparent confusion and “clarified that there is
no presumption of confidentiality in
Section 220 productions.” Id. Rather, the Court of Chancery “must
assess and compare benefits and harms when determining the initial degree and
duration of confidentiality.” Id.
The
Takeaways
The Court’s decision in
Tiger bucks the recent trend in which courts had found a presumption of
confidentiality in Section 220 demands. Given the high importance that many
corporations place on maintaining the confidentiality of their books and
records, the decision in Tiger is likely to result in a vast amount of
litigation over confidentiality issues in the context of inspections of
corporate books and records.
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