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Aug. 24 — Companies, including Yahoo Inc., are imposing more conditions before allowing shareholders to inspect their books and records.
In a recent example, technology startup Domo Inc. required shareholder Jay Biederman to sign an agreement that any documents he obtained wouldn't be used in a subsequent lawsuit against the company.
Biederman, a former employee who sought the records in connection with the value of his stock, Aug. 15 filed a lawsuit in the Delaware Chancery Court challenging the requirements. He also alleged that Domo tried to muzzle him by filing an arbitration demand and suing him for defamation in a Utah state court.
Meanwhile, the chancery court earlier this year allowed Yahoo to condition Amalgamated Bank's inspection on the shareholder's agreement to incorporate the requested materials in any derivative complaint it later filed (22 CARE, 2/3/16).
Companies are placing “creative” conditions on books and records requests, Lawrence Hamermesh, a professor at Widener University Delaware Law School who teaches corporate governance, told Bloomberg BNA.
There has been a “significant evolution” in this emerging area over the last year or two, he said.
Delaware law allows shareholders to inspect a company's books and records for any legitimate reason. It has become common practice for companies to require shareholders to sign confidentiality agreements before turning over the requested documents. What's less clear is whether companies can condition the production of the materials on terms beyond those that restrict the public disclosure of proprietary information.
The Delaware Supreme Court was confronted by a unique condition in a 2014 case that has set a precedent for later actions. In the case, United Technologies Corp. would only allow inspection if the shareholder agreed to a forum selection provision that required any related lawsuit to be brought in Delaware.
The state high court agreed that the condition was legitimate, finding that the chancery court has wide latitude on these matters (13 CARE 39, 1/2/15).
In its ruling this year on Yahoo's inspection litigation, the chancery court cited the United Technologies decision.
The Delaware courts have basically ruled that reasonable conditions are fine, Hamermesh said. If there is a guiding principle on this issue, it is that conditions that are in the interests of the corporation and its shareholders generally are allowed, he said. However, where the condition infringes upon the rights of shareholders, such as limiting the right to sue, “then it seems less defensible.”
Several lawsuits now are litigating what types of restrictions may be placed on shareholders. In addition to the Domo action, a complaint filed by a Hay Island Holding Corp. shareholder alleged that the closely held firm would only allow inspection if it could restrict her right to share the information, including with her attorney.
Attorneys that represent shareholders in an inspection demand must closely scrutinize any confidentiality agreements companies want their clients to sign to ensure that the clients are not lured into something that may be against their interests, said Biederman's attorney, Theodore A. Kittila, a member of Wilmington, Del.-based law firm Greenhill Law Group LLC.
The conditions imposed by Domo are “absolutely ridiculous,” Kittila told Bloomberg BNA. “Biederman is doing everything he possibly can to stand up to these guys.”
Domo's attorneys and representatives have declined to comment on the case. However, they sent the court an Aug. 18 letter in which they argued that their condition should be allowed.
It is “entirely reasonable” for the court to “condition the obligation of Domo, a private company, to produce its sensitive financial information upon Plaintiff's agreement that he will only use those documents for his stated purpose—to value his stock,” their letter said.
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