Section 220 Demands and Confidentiality Agreements

In Tiger v. Boast Apparel, Inc., No. 23, 2019 (Del. Supr. Aug. 7, 2019), the Delaware Supreme Court addressed Section 220 demands and the prevailing corporate practice of requiring confidentiality agreements before a stockholder is entitled to its books and records.

The opinion resulted in two important holdings:

(1) Although Section 220 inspections are typically subject to a confidentiality order, such inspections are not subject to a presumption of confidentiality; and

(2) When the court, in its discretion, enters a confidentiality order, an indefinite period of confidentiality protection is not dependent on a showing of the absence of exigent circumstances by the stockholder.

In the case at bar, an initial Section 220 demand was made in December 2014.  The primary dispute related to the scope and duration of a confidentiality agreement that the company required.  A second Section 220 demand was made in February of 2017, but yet again the parties could not reach agreement over the terms of a confidentiality agreement.  In October 2017, a complaint was filed in the Court of Chancery demanding access to books and records based on an amended demand made in May 2017.  The scope of the confidentiality obligations imposed by the company on its production remained the primary dispute.

A Master in Chancery submitted a report in July 2018 recommending indefinite confidentiality until such time as the stockholder filed a suit based on the inspection, after which confidentiality would be controlled by the applicable court rules. This appeal followed the finality of the Master’s Report.

Although the Supreme Court disagreed with the Court of Chancery’s reasoning, it affirmed the decision because there was no abuse of discretion or reversible error with the result.  The Supreme Court clarified that there is no presumption of confidentiality in Section 220 productions. Instead, the Court of Chancery must assess and compare benefits and harms when determining the initial degree and duration of the confidentiality order.  In crafting the degree and duration of a confidentiality order, the burden on the corporation is more demanding and the burden on the shareholder is less demanding because there is no presumption of confidentiality in Section 220 productions.

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