By: Marc Casarino
Section 220 of the Delaware General Corporation Law permits stockholders to request inspection of a corporation’s books and records. This access is not unlimited. For example, the stockholder must demonstrate a proper purpose, such as valuing its investment or investigating mismanagement. Further, Section 220(c) provides that “the Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other or further relief as the Court may deem just and proper.” Therefore, beyond the statutory access restrictions, corporations often seek limitations on the disclosure and use to which the stockholder may put the information learned from the inspection. The most frequent limitation is a confidentiality order. Indeed, confidentiality orders have become so ubiquitous that a presumption of confidentiality pervades Section 220 inspections.
In an August 7, 2019 decision in Tiger v. Boast Apparel, Inc., C.A. No. 2017-0776, the Delaware Supreme Court clarified that Section 220 inspections are not presumptively confidential. Rather, the trial court must exercise its discretion to determine whether a confidentiality restriction is appropriate based upon the circumstances at hand. This necessarily requires the trial court to “weigh the stockholder’s legitimate interest in free communication against the corporation’s legitimate interest in confidentiality.”
While this decision counsels that confidentiality should not be reflexively granted, some level of confidentiality is likely to remain the norm for Section 220 inspections. By imposing an abuse of discretion standard, the Supreme Court has set a high bar for any party challenging the trial court’s ruling on confidentiality. Under this standard, the trial court’s confidentiality ruling will stand unless it is arbitrary or capricious or exceeds the bounds of reason in light of the circumstances. Moreover, the decision recognizes that corporations “will often be able to demonstrate that some degree of confidentiality is warranted where they are asked to produce nonpublic information.” The corporation need not show specific harm that would result from the disclosure to support a confidentiality request. Balancing these factors, it stands to reason that the scale will more often than not tip in favor of imposing some degree of confidentiality over virtually all Section 220 inspections.
This being said, the decision further clarifies that “an indefinite period of confidentiality protection should be the exception and not the norm.” The stockholder need not show exigent circumstances to secure a less than indefinite period of confidentiality protection. Rather, the duration of the confidentiality is also subject to the trial court’s discretion based upon the circumstances.
In conclusion, parties and their counsel should anticipate that some degree of confidentiality will be imposed over Section 220 inspections, but not indefinitely unless there are legitimate grounds for such a lengthy restriction. The Supreme Court’s affirmance of the trial court’s decision to impose confidentiality only until such time as the stockholder pursued a derivative lawsuit is telling in this regard. The Court applied a balanced approach in recognizing that corporations may have a legitimate interest in protecting important proprietary information, such as trade secrets or other non-public information, while enabling a stockholder to use the information in litigation – subject only to the confidentiality restrictions normally applicable under the civil rules.