On Aug. 7, 2019 the Delaware Supreme Court held in Tiger v. Boast Apparel that documents produced pursuant to books-and-records inspection requests under §220 of the Delaware General Corporation Law are not subject to a presumption of confidentiality. Rather, while courts can impose confidentiality restrictions in appropriate cases, there must be some justification that the confidentiality is necessary and indefinite periods of confidentiality should be the exception and not the rule.

Background

In 2010 Alex Tiger and John Dowling attempted to revive the Boast apparel brand, originally created by tennis player Bill St. John, through a joint venture called Boast Investors (later converted to the named defendant in the case, BAI Capital Holdings). Dowling and Tiger had several disputes running this venture, including a series of transactions whereby Dowling increased his equity stake in Boast Investors despite opposition from Tiger. Tiger and Dowling tried, but failed, to resolve these disagreements through negotiations.

On Dec. 9, 2014 Tiger delivered his first §220 demand to BAI stating the purposes of his inspection were to, among other things, value his shares, investigate potential mismanagement, and investigate director independence. After failing to agree on terms for a confidentiality agreement, Tiger made a second §220 demand, which again led to failed confidentiality negotiations. Following these failed negotiations, BAI sold substantially all of its assets to Boast Brands Group, a company owned by a group of clothing and investment companies. Following the sale, BAI received a 10% equity stake in Boast Brands Group. Tiger then filed a §220 action against BAI in the Court of Chancery demanding access to the books and records specified in his first §220 demand.

The primary dispute before the Chancery Court was the scope of Tiger's confidentiality obligations upon BAI's production of relevant books and records. Due in part to the belief that such requests are subject to a presumption of confidentiality, the Master in Chancery recommended an indefinite confidentiality period lasting up to and until Tiger filed suit based on facts learned through inspection, at which point confidentiality would be controlled by applicable court rules. Tiger then appealed, arguing that the confidentiality order constituted an abuse of discretion.

The Delaware Supreme Court's Decision

Rejecting the Court of Chancery's reasoning but affirming its decision, the Delaware Supreme Court held that book-and-records inspection requests under §220 are not subject to a presumption of confidentiality and further that an indefinite period of confidentiality should be the exception and not the rule.

At the heart of the Tiger decision is §220, which allows shareholders of Delaware corporations to demand inspection of corporate books and records if the shareholders can satisfy certain requirements, including establishing a proper purpose for the request like valuing the shareholder's shares or investigating various misconduct. Delaware courts often encourage shareholders to make such demands as they help to weed out claims that have no merit and strengthen those that do. When handling such requests, corporations often seek to impose confidentiality restrictions on the productions, and some Delaware courts have taken the position that confidentiality should be presumed.

This practice, corrected in Tiger, stems in part from language in the Court of Chancery's 2004 opinion in Disney v. Walt Disney Co., which denied the plaintiff's petition to lift certain confidentiality conditions attached to documents produced in a §220 request, which he sought so that he might conduct a proxy campaign against the corporation's directors. The Chancery Court stated that it "begins its analysis with the presumption that the production of nonpublic corporate books and records to a stockholder making a demand pursuant to Section 220 should be conditioned upon a reasonable confidentiality order." Disney v. Walt Disney Co., 857 A.2d 444, 447 (Del. Ch. 2004) (emphasis added). Following this decision, the plaintiff appealed to the Supreme Court of Delaware which, finding the underlying decision unclear, remanded the case to the Court of Chancery to make specific findings as to confidentiality. On remand, the Court of Chancery again denied the plaintiff's claim, however, in its second opinion it stated that the analysis properly begins with an "observation" that nonpublic records are often kept confidential, dropping mention of a presumption. While the Court of Chancery essentially disclaimed its earlier statement that a presumption of confidentiality exists for §220 requests, subsequent decisions by the Court of Chancery have focused on the language in the first opinion and concluded that a presumption does exist.

In Tiger, the Delaware Supreme Court took the opportunity to clarify that there is no presumption of confidentiality in §220 productions. While courts certainly have the power to impose confidentiality restrictions, and will often likely do so given the nonpublic nature of the information at issue, they must nevertheless assess and compare benefits and harms when determining the initial degree and duration of any confidentiality agreement. The Supreme Court noted that corporations resisting production are not burdened with the need to show specific harm that would result from disclosure, however courts cannot reflexively conclude that confidentiality is appropriate.

As for duration, the Supreme Court stated that "an indefinite period of confidentiality protection should be the exception and not the rule." Tiger v. Boast Apparel, __ A.3d __, 2019 WL 3683525, at *5 (Del. Aug. 7, 2019). While an indefinite confidentiality period may well be reasonable given the circumstances of a particular case, a party need not show, as was required by the Court of Chancery in Tiger, exigent circumstances in order for a court to grant something less than indefinite confidentiality. Therefore, a court should "weigh the stockholder's legitimate interests in free communication against the corporation's legitimate interests in confidentiality" when imposing a period of confidentiality. Id. at 1.

Despite rejecting the basis of the Chancery Court's opinion, the Supreme Court ultimately found the confidentiality conditions at issue reasonable under the circumstances. The court rejected Tiger's argument that an indefinite confidentiality order caused an undue burden on his ability to exercise his inspection rights because this concern was merely hypothetical. The confidentiality order in place allowed Tiger to share documents with his accountants and tax preparers for inspection purposes. Tiger further argued that the Chancery Court erred by valuing BAI's concern that Tiger might improperly use its books and records over Tiger's concern that an indefinite period of confidentiality would be used by BAI to interrupt his work in the apparel market. The Supreme Court again rejected Tiger's argument, stating that it was well within the discretion of the Court of Chancery to weigh one concern over another.

Implications for the Future

The immediate implications of the Tiger decision are apparent: shareholders and corporations will need to give greater thought to the necessity and duration of any confidentiality restrictions on §220 document productions as simply defaulting to indefinite confidentiality restrictions will be disfavored in Delaware courts moving forward. Outside of this immediate concern, the Tiger decision leaves several open questions with regard to §220 requests that might be explored by future courts.

First, because shareholders often make §220 demands in anticipation of derivative actions, confidentiality agreements generally allow the produced documents to be used in any claims that eventually are filed. However, these agreements often require redaction of nonpublic §220 information causing plaintiffs to file their complaints under seal while also filing redacted, public versions of their pleadings. This practice, which does not seem to impose serious restrictions on shareholders' ability to use §220 information, is not specifically addressed in the Tiger decision.

An additional possibility is the extent to which future courts will restrict parties under §220 confidentiality agreements from communicating with other shareholders about potential derivative claims involving nonpublic information that they have gathered. While the Supreme Court does not address this scenario, in a footnote it does note that in Disney it had contemplated that one benefit that could potentially be weighed in favor of a stockholder in a §220 analysis is the desire to use §220 documents in communication with other stockholders in a legitimate proxy campaign. Courts will inevitably grapple with such issues as they establish the bounds of confidentiality orders in light of Tiger.

Margaret A. Dale and Mark D. Harris are partners at Proskauer Rose. Nathaniel J. Miller, an associate at the firm, and partner Jonathan E. Richman contributed to the writing of this article.