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‘This Is Confidential’ — Don’t Be So Sure

The Delaware Court of Chancery has just instituted new rules concerning sealing of confidential records in litigation. That means boards need to take greater care in protecting confidential company information.

By Rolin P. Bissell, partner at Young Conaway Stargatt & Taylor LLP

On January 1, 2013, amendments to the Delaware Court of Chancery’s rules governing the handling of confidential information filed with the Court will become effective.

The amendments, which can be found in new Rule 5.1 of the Court of Chancery Rules, seek to curtail the amount of material that parties to a lawsuit designate for confidential treatment and to make it easier for both the press and the public at large to challenge a party’s confidentiality designations — and thus gain access to that material.

Litigation has long provided a peephole through which the press, public, shareholders, competitors and critics of a company have been able to access otherwise private and inaccessible information about a company. Under new Rule 5.1 that peephole will get larger.

As a result, boards of directors, corporate secretaries, and board advisors will need to take even greater care in handling companies’ confidential information, particularly in litigation. 

Significance for Boards
The changes in Rule 5.1 are potentially significant for boards because the Delaware Court of Chancery is the court that hears the most disputes about mergers and acquisitions, contests for control, director liability, and other corporate governance issues. Moreover, it is not unusual for activist stockholders, dissident directors, or hostile bidders to want to use and make public confidential information of a company.

For example, in recent years, dissident directors have sought to use confidential information they received through books-and-records requests in connection with proxy contests to oust certain other directors. Similarly, an activist shareholder sought to make public the details surrounding a CEO’s resignation in connection with a hostile bidder’s attempt to elect new directors. Rule 5.1 will likely make it more difficult for a company to protect this type of information from public disclosure once litigation starts.

Seeking to balance the public’s right of access to information about judicial proceedings with the legitimate needs of the litigating parties to have certain information treated as confidential, Rule 5.1 is intended to limit the types of information that can be filed under seal as confidential and make it easier for both litigants and the press to challenge overbroad confidentiality designations.

A Narrower Definition
The key change is a narrowing of the definition of what constitutes “good cause” to designate information as confidential. As amended, Rule 5.1 defines “good cause” to exist “only if the public interest and access to court proceedings is outweighed by the harm that public disclosure of sensitive, non-public information would cause.” 

Rule 5.1 provides the following examples of confidential information: “trade secrets; sensitive proprietary information; sensitive financial, business, or personal information; sensitive information such as medical records; and personal identifying information such as Social Security numbers, financial account numbers, and the names of minor children.”

Under Rule 5.1, if a confidentiality designation is challenged, the party seeking confidential treatment has the burden of showing that good cause exists.

What Happened to Mark Hurd
Meeting the “good cause” standard and protecting confidential information is more difficult than it looks.

In 2011, the Delaware courts decided that there was not “good cause” to treat as confidential a letter former Hewlett-Packard Co. CEO Mark Hurd received from an attorney, Gloria Allred, on behalf of a former HP independent contractor, Jodie Fisher. The letter Allred sent to Hurd was marked “personal and confidential” and was sent with the intent of initiating a confidential mediation. Hurd, Fisher and Allred all said their intent was that the letter was confidential and should remain so.

But Hurd had given Allred’s letter to HP’s general counsel. After Hurd had left HP, HP provided Allred’s letter to a shareholder plaintiff in response to a books-and-records demand. The shareholder plaintiff then attached Allred’s letter to a complaint seeking additional books and records from HP.

The Court of Chancery reasoned that because the letter had been attached to the shareholder plaintiff’s complaint and filed with the Court, whether the document should remain confidential had to be balanced against the public’s right to access to the proceedings of the Court. The Court found that although some of the details of the letter might be “mildly embarrassing,” that was not enough to make the document confidential, and ordered Allred’s letter unsealed. New Rule 5.1 will likely make meeting the “good cause” standard for confidential treatment still more difficult.

Challenges to Confidential Treatment Made Easier
New Rule 5.1 also creates a simple process by which the public and press may challenge the confidential treatment of material that has been filed confidentially. A member of the public or press only need file a notice with the Court, and the notice need not articulate the basis for the challenge.

Once the challenge notice is filed, the party seeking to maintain the continued confidentiality of the information must establish that good cause exists. This simplified notice provision will likely increase press and public challenges to confidential treatment and increase the burden on a company seeking to protect confidential information.

As a result, boards and the companies they serve will want to be even more careful with the creation and handling of confidential information. Lawyers advising boards will want to inform board members how litigation may lead to disclosure of information that a board member may consider private.

Rolin P. Bissell is a partner at Young Conaway Stargatt & Taylor LLP in Wilmington, Del., and is chair of Young Conaway’s Corporate Counseling and Litigation Section. He represented parties in several of the litigations discussed in this article.

The views he expresses are his personal views and not necessarily the views Young Conaway or its clients. He can be contacted at rbissell@ycst.com.

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