In the decision of James Rivest v. Hauppauge Digital, Inc., No. 442, 2022 (Del. July 10, 2023), the Delaware Supreme Court considered the extent to which a Delaware corporation's production of books and records under Section 220 of the Delaware General Corporation Law should be subject to confidentiality restrictions.
Background
James Rivest was a "deep value" investor and the beneficial owner of Hauppauge Digital, Inc. stock, purchased in the over-the-counter (OTC) securities markets. Hauppauge had been a Nasdaq-listed company but "went dark" and voluntarily de-listed from the exchange around 2014. Its shares continued to trade in over-the-counter (OTC) markets.
In 2019, Rivest sought to inspect Hauppauge's financial records for valuation purposes. Hauppauge did not respond to Rivest's request, and eventually, Rivest filed a complaint with the Delaware Court of Chancery to compel inspection of the records under Section 220. Hauppauge did not respond, and Rivest requested that the court enter a default judgment.
The court entered a default judgment against Hauppauge on April 24, 2020. Later that day, the court received a mailed response from Hauppauge. While the letter was received after the April 24 hearing, the postmark on the letter indicated it was timely mailed on April 20, 2020.
Hauppauge then filed a motion to vacate the default judgment under Court of Chancery Rule 60(b)(1). In its motion, Hauppauge argued that its good faith effort to comply with the Court's deadline should be sufficient to prevent a default judgment, especially given the raging COVID-19 pandemic. It also believed it had put forth a meritorious defense against revealing the requested financial information because it believed it was no longer required to comply with securities rules regarding disclosure of financial statements.
The Court considered Hauppauge's arguments and vacated the default judgment. Hauppauge did not object to disclosure, as long as the records were subject to confidentiality requirements. In reliance upon the rationale of Tiger v. Boast Apparel, Inc., 214 A.3d 933 (Del. 2019), the Court of Chancery rejected this argument, holding that Rivest was entitled to the records free of any restrictions, and ordered Hauppauge to disclose the records. Hauppauge appealed this judgment to the Delaware Supreme Court.
On appeal, the Supreme Court upheld the decision of the Court of
Chancery, stating that in the absence of compelling evidence of a
need for such restriction, Hauppauge was not entitled to any
confidentiality protection, and the Court of Chancery's
rejection of a confidentiality provision was not an abuse of its
discretion. The High Court held that the Court of Chancery properly
weighed the parties' legitimate interests
under Tiger, concluding that Hauppauge's interest in
placing confidentiality
restrictions on financial statements for closed periods did not
outweigh Rivest's
legitimate interests in free communication.
Takeaway
The Rivest decision is notable in that it demonstrates that Delaware courts will put a corporation to the test to demonstrate why it should be permitted to produce records confidentially in response to a Section 220 books and records demand. If it cannot satisfy this burden, then it will be ordered to make the inspection free and clear of confidentiality restrictions.
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