Chancery Modifies Confidentiality Order to Permit Assertion of Plenary Claims in Appraisal Action
Harris v. Harris FRC Corp., C.A. No. 2019-0736-JTL (Del. Ch. Jan. 7, 2021)
Under Rule 5.1, the Court of Chancery may enter a confidentiality order upon a showing of good cause that such an order is necessary to protect against disclosure of sensitive, non-public information. But Rule 5.1 does not set an express standard for later modification of the order. In this case, the Court of Chancery clarified that the standard for modifying a confidentiality order is the same as for entering one: good cause shown, taking into account related factors including the parties’ reliance on the existing order and the potential prejudice from modification.
Petitioner filed an appraisal action after it appeared that Respondent reincorporated to New Jersey via a merger to avoid Petitioner’s Section 220 demand to inspect Respondent’s books and records for suspected wrongdoing. The Use Restriction in the parties’ confidentiality order limited use of confidential information to Petitioner’s appraisal action. After discovery, Petitioner moved to modify the Use Restriction so that Petitioner could assert plenary claims.
Borrowing the standard from the Delaware Superior Court (and affirmed by the Supreme Court), the Court granted the motion. Petitioner’s claims established good cause for amendment, and modification did not upset the parties’ expectations because the appraisal petition reserved Petitioner’s right to assert new claims. The Court held that Respondent would not be prejudiced merely from the filing of new claims because the Use Restriction was not a covenant not to sue, and modification would permit Respondent to assert any claims it identified in discovery. Unlike other cases where modification was denied, Petitioner sought to use the information in a Delaware action, not to start a new action elsewhere.
Finally, the Court permitted Petitioner to add his claims through amendment rather than a new action. Although the Court recognized that prior Chancery cases diverged on whether plenary claims could be asserted in an appraisal action, the Court concluded that the practical outcome would be same whether the claims were asserted separately or together.