Another Section 220 Landmine: Opportunistic Third-Party Challenges to Confidentiality
Delaware Section 220 corporate books and records inspection demands have long been a precursor to stockholder litigation. Companies often challenge the propriety and scope of inspection demands and, even when companies ultimately produce books and records for inspection, they routinely do so subject to a confidentiality agreement. However, a February 28, 2022 letter decision in In re Lordstown Motors Corp., Stockholder Litigation illustrates how confidentiality agreements may not fully protect the information in those books and records from public disclosure or use in other litigation.
As discussed in another recent post on this blog, electric-vehicle manufacturer Lordstown Motors Corp. (“Lordstown”), a de-SPAC corporation, is currently the subject of multiple stockholder suits related to disclosures regarding its purchase orders and production timelines. In a suit filed in the Delaware Court of Chancery, Lordstown stockholders brought an action against Lordstown’s directors and controlling stockholder alleging, among other things, breach of fiduciary duty. In a separate action pending in federal court in the Northern District of Ohio, Lordstown stockholders brought claims against the company and certain current and former directors and officers alleging violations of federal securities laws.
Prior to initiating the Delaware suit, the plaintiff stockholders obtained certain Lordstown’s books and records, including Board advisors’ analyses and the company’s communications with customers. Those records were produced subject to a customary confidentiality agreement, and the plaintiffs subsequently filed their complaint in redacted form to the extent it relied on the materials obtained under Section 220.
Non-party George Troicky, a plaintiff in the Ohio securities class action (but not the Delaware suit), soon filed a motion challenging the confidential treatment and redaction of the complaint under Rule 5.1(f). As the court recognized, “Troicky’s motivations in pursuing this challenge are obvious”: because he “previously raised – and lost – a challenge to the automatic discovery stay imposed by the Private securities Litigation Reform Act (‘PSLRA’) in his federal lawsuit,” Troicky “seeks information redacted from the complaint in [the Delaware action] that might prove useful in his securities claims.”
The Delaware Court of Chancery determined that, regardless of the identity of the challenger, it was required to determine whether the strong “public interest in access to Court proceedings is outweighed by the harm that public disclosure of sensitive, non-public information would cause.” The court reaffirmed Delaware’s general approach to the confidential treatment of competitively sensitive information, and permitted Lordstown to maintain confidentiality over only non-public and “specific, sensitive details” of advisors’ analyses or purchasers’ identities and orders. More “general descriptions of . . . production problems and preorders” were required to be disclosed. Although the court recognized that Troicky’s efforts might help him circumvent the automatic stay of discovery under the PSLRA in the Ohio action, it determined that the Ohio court was “eminently capable of determining if Troicky has overstepped” and responding appropriately.
However, the identity of the challenger was not entirely irrelevant to the court’s analysis either. Troicky’s self-interested motivations for seeking the information “further tip[ped] the balance against disclosure” of the more sensitive categories of information because “[t]hat motivation is unique to Troicky – not indicative of a broad public interest.”
This recent decision highlights yet another risk to companies who must produce books and records in response to a Section 220 demand, even with a well-drafted confidentiality agreement in place. Corporate defendants faced with stockholder litigation in multiple courts should keep an eye open to how information from books and records produced in one suit might be accessed and used by plaintiffs in another, and should consider how best to defend against opportunistic attacks against confidential treatment of their materials, whether in Delaware or in another forum where those materials could be misused.
This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.
