Corporate & Securities Blog

Confidentiality Is Key In Stockholder Information Rights

One of the most important yet overlooked aspects of any commercial or corporate transaction involves confidentiality obligations. Often, parties gloss over the scope of the covenants, treat them as boilerplate using precedent without thinking through the details, such as what information needs to be protected in the particular transaction at hand, who should be subject to the restrictions, what limitations need to be imposed on the use of any disclosed information and sometimes, forget to include the covenant or enter into a separate confidentiality agreement altogether.

This is especially true for venture capital, private equity and related fundraising transactions where companies may have numerous stockholders with varying or conflicting interests. For expediency and cost savings, early-stage venture capital deals typically involve the use of standardized forms, such as the Series A financing documents published by the National Venture Capital Association (NVCA). The NVCA forms include typical information and inspection rights which give at least significant investors broad-based access to confidential information regarding the company. Therefore, the NVCA forms do include a confidentiality provision protecting information received by investors in this context. Having said this, lawyers should still review these documents carefully and consider the specifics of the company and transaction, for example, the types of investors involved (e.g., funds vs. strategic investors), as there may be different sensitivities based on the nature of the investor.

However, not all early-stage venture capital transactions use the NVCA forms, and many later-stage venture and private equity deals use bespoke sets of agreements prepared by individual law firms. And, even when precedential forms have been supposedly fine-tuned over time, they may not have adequate provisions for confidentiality in the context of the specific transaction. Further, there may be certain investors not covered by the provisions of the NVCA forms or other primary transaction documents (either because they don’t meet the threshold set forth in the documents to qualify for information rights in such documents or they are investing through another type of instrument, such as a convertible note). In such cases, it is customary for such investors to request information rights, rights to inspect company records and access to management in a side letter. It is important to make sure that side letter rights also are subject to adequate confidentiality and non-use restrictions.

In addition to contractual rights, Delaware corporations need to keep in mind that under Section 220 of the Delaware General Corporation Law (the DGCL), stockholders of a Delaware corporation have the statutory right to access corporate books and records for a “proper purpose.” The term “proper purpose” is not expressly defined in the DGCL, but cases involving such demands generally arise in the context of allegations that a stockholder desires to value its interest in the company or has a credible basis to believe there is wrongdoing or mismanagement at the company or a breach of fiduciary duties by officers or directors.

This was seen in a recent Delaware case1 (Rivest v. Hauppauge Digit., Inc.) in which the court permitted the disclosure of nonpublic information to a stockholder of a public corporation who exercised his Section 220 rights and did not afford confidential treatment to the corporation’s books and records. This case involved an individual plaintiff seeking to value his shares in a corporation that went “dark” for a number of years, did not make any public disclosures and ignored the requests of the plaintiff for financial and other information concerning his investment.

The court stated that there is no presumption of confidentiality as it relates to a Section 220 demand, and the relevant facts and circumstances at hand would be weighed in determining whether or not to afford confidential treatment. The court went through a thorough and detailed analysis of the harm that could be imposed on the corporation for not affording confidential treatment of the corporation’s financial information, including that such information could be used by competitors of the corporation and could put the corporation out of business. On the contrary, the court also detailed the benefits of allowing the plaintiff to obtain such financial information without confidential treatment, including that the plaintiff was seeking basic financial information to value his shares, which falls within the criteria for a proper purpose for a Section 220 demand. In determining not to afford confidential treatment to the disclosed information and permitting the plaintiff to inspect the corporation’s financial records, the court stated that “Rivest has established a significant interest in obtaining financial statements for closed periods free of any confidentiality restriction [and] [t]he Company has not made a showing sufficient to outweigh Rivest’s interest and warrant a two-year confidentiality restriction.”

While the company at issue in Rivest v. Hauppauge Digit., Inc. was a public company, in a recent transaction in which we were involved, a venture capital-backed company was pursuing a sale transaction and had a strategic investor who was potentially interested in acquiring the company. The company received a written request from such stockholder, purportedly in the context of wanting to monitor its investment. The request (which was not a formal Section 220 demand) was for various information pursuant to such stockholder’s information rights in an investor rights agreement. The information requested was highly sensitive because of the ongoing negotiations of the sale, certain prior communications with such stockholder indicating such stockholder was not necessarily supportive of the sale, and the fact that this stockholder had a commercial relationship with the company.

In that matter, the investor was subject to adequate contractual confidentiality and non-use restrictions on the information, but in the absence of such limitations, this could have been highly problematic because disclosure could have violated agreements with the potential acquirers and could have led to leaks of information on a highly confidential transaction and potentially disrupted the closing of the sale. The absence of such restrictions could have allowed the recipient to share the information or use the information for a purpose other than monitoring its investment. If this stockholder had sought to make a Section 220 demand, the existence of the confidentiality provision in the agreement would likely have led a court to provide confidential treatment to any disclosed information – however, in future transactions, we have already made a note to make sure we explicitly extend these provisions to any demand, not just the information provided under the investment documents.

Statutory information rights can be waived, and the investor rights agreement published by the NVCA does include an optional provision for the waiver of statutory information rights, though we don’t typically see investors agreeing to such a provision. Therefore, when statutory information rights are intact and not expressly waived, any contractual confidentiality obligation needs to take into account not only information provided pursuant to contractual information rights but also information provided in other contexts, such as statutory information rights. Further, it is critical, especially in private companies, to include strong confidentiality obligations in investment documents whether or not such documents provide stockholders with explicit rights to disclosure of, or access to, confidential and proprietary information, in order to protect such information from unwanted use and/or disclosure beyond the particular stockholder and for proper purposes. Such agreements should clearly define the types of information protected, the defined purposes for which such information may be used and the parties with whom such information may be shared (e.g., a venture capital or private equity fund may request the right to share certain limited information with its partners for valid reporting purposes). In the absence of such pre-existing agreement at the time of the demand (often made without court intervention), companies should also keep in mind that it is customary to ask for a confidentiality agreement before sharing such information.

1See Rivest v. Hauppauge Digit., Inc., 2022 WL 3973101, at * 1 (Del. Ch. Sept. 1, 2022).


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