Under the Delaware General Corporation Law, title 8, section 220, and similar statutes governing alternative entities, demands to inspect books and records have long been a precursor to stockholder litigation. While many companies challenge the inspection demands to a certain extent, many companies ultimately produce books and records for inspection subject to a confidentiality agreement. However, In re Lordstown Motors Corp. Stockholder Litigation, No. 2021-1066-LWW, 2022 Del. Ch. LEXIS 46 (Del. Ch. Feb. 28, 2022) (letter decision), illustrates how confidentiality agreements may not fully protect the information in those books and records from public disclosure or use in other litigation.

Background

Lordstown Motors Corp. (Lordstown or the Company) is an electric-vehicle manufacturer that is currently the subject of multiple stockholder suits related to disclosures regarding its purchase orders and production time lines. In one suit filed in the Delaware Court of Chancery, Lordstown’s stockholders brought an action against the Company’s directors and controlling stockholder alleging, among other things, breach of fiduciary duty.

Separately, in an action pending in the U.S. District Court for the Northern District of Ohio, Lordstown’s stockholders brought claims against the Company, certain current and former directors, and its officers alleging violations of federal securities laws.

Prior to initiating the action in Delaware, the plaintiff stockholders obtained certain Lordstown’s books and records under 8 Del C. section 220, including analyses from the advisors to the Company’s board of directors and Lordstown’s communications with customers. As is common, in response to the books and records demands, those records were produced subject to a customary confidentiality agreement. The stockholder plaintiffs subsequently filed their complaint in redacted form to the extent it relied on the materials obtained under section 220.

George Troicky, a plaintiff in the Ohio securities class action (but not the Delaware suit), filed a motion under Court of Chancery Rule 5.1(f) challenging the confidential treatment and redaction of the complaint. As the court recognized, “Troicky’s motivations in pursuing this challenge are obvious.” Because he “previously raised – and lost – a challenge to the automatic discovery stay imposed by the Private Securities Litigation Reform Act (PSLRA)” in his federal lawsuit, Troicky now “seeks information redacted from the Complaint in [the Delaware action] that might prove useful in his securities claims.”

Analysis

The Delaware Court of Chancery determined that, regardless of the identity of the challenger (whether the challenger is a party, a non-party, or a related party), it was required to determine whether the strong “public interest in access to court proceedings is outweighed by the harm that public disclosure of sensitive, non-public information would cause.” The court noted that the identity of the party challenging confidential treatment “is irrelevant to whether Rule 5.1 applies.” Unlike in the section 220 context, a petitioner challenging confidential treatment is not required to state a “proper” purpose as a predicate for its challenge.

However, the identity of the challenger was not entirely irrelevant to the court’s analysis either. Troicky’s self-interested motivations for seeking the information “further tip[ped] the balance against disclosure” of the more sensitive categories of information because “[t]hat motivation is unique to Troicky – not indicative of a broad public interest.”

The court reaffirmed Delaware’s general approach to the confidential treatment of competitively sensitive information and permitted Lordstown to maintain confidentiality over only non-public and “specific, sensitive details” of advisors’ analyses or purchasers’ identities and orders. However, more “general descriptions of…production problems and preorders” were required to be disclosed.

The court also recognized that Troicky’s efforts might help him circumvent the automatic stay of discovery under the PSLRA in the Ohio action. However, the court found that the Ohio court was “eminently capable of determining if Troicky has overstepped” and “violated the letter or spirit of the PLSRA.”

Key takeaways

This recent decision demonstrates a sometimes unavoidable risk to companies that must produce books and records in response to a section 220 demand – even with a well-drafted confidentiality agreement in place. Corporate defendants faced with litigation in multiple courts should be mindful of what specific information from a books and records production might be accessed and used by plaintiffs in another action.