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Supreme Court Affirms Court of Chancery’s Decision Directing “Long Dark” Company to Produce Books and Records to a Stockholder Free of Confidentiality Restrictions

Hauppauge Digital, Inc. v. Rivest, C.A. No. 2019-0848 (Del. July 10, 2023).

Under Delaware law, once a stockholder has established a proper purpose to inspect a corporation's books and records, the Court of Chancery has the discretion to impose limitations or conditions on the Section 220 production. In this case, the Supreme Court of Delaware agreed with the Court of Chancery's decision not to impose any limitations on the production.

Here, the stockholder sought financial information from a former publicly traded company that went "dark" and delisted in 2014. The Company's representative argued that producing financial statements without a confidentiality agreement would harm the Company's business. The Court of Chancery found that the Company did not provide a basis sufficient to warrant the restraint. On appeal, the Company's representative argued that the Court of Chancery erroneously applied a balancing test when determining whether the confidentiality restrictions were warranted and that the Court imposed a heightened burden on the Company. The Supreme Court disagreed. It explained that the Court of Chancery reviews conditions and restrictions on Section 220 productions through "a context-driven balancing exercise, the result of which will not be disturbed on appeal unless clearly unreasonable or capricious." The Supreme Court further explained that the Court weighs the stockholder's legitimate interests in free communication against the corporation's legitimate interests in confidentiality. Even though a corporation is not required to show specific harm that would result if confidentiality was not imposed, such harm is not presumed automatically. In this case, the Court of Chancery determined that the stockholder's interest in being able to freely share the financial statements, including sharing the documents with the other stockholders, was greater than the Company's interest in keeping this information confidential. The Supreme Court affirmed and agreed that Delaware law does not include a presumption of confidentiality restrictions for stockholders' books and records inspections.

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