For Section 220 Productions, Confidentiality Is In The (Discretionary) Eye Of The Court

Last year, applying a 2019 Delaware Supreme Court opinion admonishing that there is no presumption of confidentiality in Section 220 productions, the Delaware Court of Chancery refused to treat certain financial information produced in connection with a books and records action as confidential. See A Reminder that in Books and Records, Nonpublic Does Not Always Mean Confidential. Recently the Delaware Supreme Court affirmed that decision, clarifying the standard the court should apply when evaluating confidential treatment.

In Hauppauge Digital, Inc. v. Rivest, a stockholder of a delisted public company requested financial information in order to value his shares. The Court of Chancery ultimately ordered that the stockholder could inspect four years of the company’s quarterly and annual financial statements, without any confidentiality restrictions. The company appealed, highlighting its status as a delisted company and the testimony from the company’s chief executive officer and chief financial officer that public disclosure — specifically, disclosure of the company’s financial condition — would harm the business. The testimony included multiple examples of incidents in which the company lost important business partners when the partners learned of its financial condition.

The Delaware Supreme Court held that, despite that evidence, the Court of Chancery had not abused its discretion in weighing the company’s interest in placing confidentiality restrictions on financial statements for closed periods against the stockholder’s legitimate interests in free communication. In particular, the court noted the Court of Chancery’s finding that any harm was meager as it came not from public disclosure of financial information, but from the fact that the company’s hidden weak financial condition became public. It held that Court of Chancery did not abuse its discretion in weighing this potential harm against the stockholder’s interests in public disclosure, including his wish to confer with other stockholders about the value of the company and his stock, and finding in favor of the stockholder.

In arriving at this finding, the court emphasized the Court of Chancery’s discretion. It expressly refused to hold that either the company or the stockholder bears the burden of proof with regard to confidential treatment, instead holding that the determination of whether to apply confidentiality protections in any particular case is a context-driven balancing exercise, the result of which will not be disturbed on appeal unless clearly unreasonable or capricious.

Despite holding that confidentiality was not warranted in this instance, the court noted that it expected that “targets of Section 220 demands will often be able to demonstrate that some degree of confidentiality is warranted where they are asked to produce nonpublic information.” Nonetheless, while some degree of confidentiality may remain the norm, Rivest is a helpful example that it is not a foregone conclusion.

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.