A Reminder that in Books and Records, Nonpublic Does Not Always Mean Confidential

A recent Delaware Court of Chancery decision provides a timely reminder that a confidential document production may not always satisfy a Section 220 demand, and there are circumstances when a single stockholder’s request for books and records will require a company to disclose nonpublic books and records without any restriction on who may view them or how they may be used.

Prior to 2019, Delaware courts often applied a presumption that a Section 220 production of nonpublic corporate books and records should be conditioned upon reasonable confidentiality protection. In 2019, the Delaware Supreme Court clarified that, while targets of Section 220 demands will often be able to demonstrate that some degree of confidentiality is warranted when the request is for nonpublic information, there is no presumption of confidentiality in Section 220 productions.

A recent Chancery Court opinion, Rivest v. Hauppauge Digit., Inc, highlights the rare circumstance in which confidential treatment of a company’s nonpublic books and records is found to not be warranted.[1]

Rivest concerned a Section 220 request made to a delisted company that had not made disclosures, provided financial information to stockholders, or held annual meetings for a few years. When a stockholder requested financial information in order to value his shares, the company ignored the request twice, prompting the stockholder to file suit. The company ignored the suit too, causing the stockholder to secure a default judgment. Only then did the company respond, successfully re-opening default judgment, arguing that the stockholder lacked a proper purpose of the inspection, and insisting that any production be subject to indefinite confidentiality restrictions. The court found that the stockholder sought books and records for the proper purpose of valuing his shares and ordered that the stockholder could inspect four years of the company’s quarterly and annual financial statements and that no  confidentiality restrictions would apply to the documents.

The court weighed the costs and benefits of production with and without any restrictions, identifying two key considerations: (1) the type of company and (2) the factual basis for potential harm if the information was not restricted.

With regard to the type of company, the court explained that it is important whether the company is publicly traded, publicly registered, private with few stockholders, or private with many stockholders. If a company is private and closely held, or built confidentiality into its constitutive documents, a confidentiality order may be warranted. However, if the company is public, or had once been public, like the company in Rivest, the type of company may weigh against confidentiality protection.

Second, the court probed the factual basis for the company’s assertion that it would be harmed by public disclosure. The Rivest court specifically noted that a formulaic argument of harm if a competitor came to possess the requested information is not enough. The court explained that if a company could justify confidentiality by having a witness point to a standard risk, courts would just be applying a presumption by another name. Instead, companies must provide some factual support and individualized risk of harm that would exist without a confidentiality order.

The Rivest court also identified three related considerations associated with the requesting stockholder: (1) the interest of the stockholder, (2) the reason for the request, and (3) the types of documents requested. Regarding the interests of the stockholder, the court explained that stockholders with conflicting interests, such as a competitor, or a stockholder already engaged in litigation with the company will be more likely to warrant confidentiality than when the request is made by a “plain vanilla retail stockholder.” Relatedly, a request from a stockholder seeking documents to investigate potential wrongdoing likely would provide a stronger basis for a confidentiality order than a request from a stockholder seeking to value their shares, as was the case in Rivest. This is in part because the types of documents sought when investigating corporate wrongs are likely to be more sensitive board and officer-level materials than backward looking financial documents. The Rivest Court grappled with the potential chilling effects of requiring production of sensitive and granular documents, explaining that while a narrow request for annual and quarterly financial statements for defined periods may not warrant a confidentiality order, executive documents and documents that are more sensitive may require a confidentiality order.

Rivest demonstrates that, without a presumption, the question of confidentiality may, in some circumstances, become a fact-intensive one, and should not be treated as a foregone conclusion when producing nonpublic company records.

[1] See Rivest v. Hauppauge Digit., Inc., 2022 WL 3973101, at * 1 (Del. Ch. Sept. 1, 2022).