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Tiger v. Boast Apparel, Inc.

Supreme Court of Delaware

August 7, 2019

ALEX TIGER, Plaintiff Below, Appellant,
v.
BOAST APPAREL, INC. (a/k/a BAI Capital Holdings, Inc.), Defendant Below, Appellee.

          Submitted: June 12, 2019

          Court Below: Court of Chancery of the State of Delaware C.A. No. 2017-0776

         Upon appeal from the Court of Chancery. AFFIRMED.

          David A. Felice, Esquire, Bailey & Glasser, LLP, Wilmington, Delaware for Appellant Alex Tiger.

          Kevin G. Abrams, Esquire, Matthew L. Miller, Esquire, Abrams & Bayliss LLP, Wilmington, Delaware, Brian J. Capitummino, Esquire, Woods Oviatt Gilman LLP, Rochester, New York, for Appellee Boast Apparel, Inc.

          Before STRINE, Chief Justice; SEITZ and TRAYNOR, Justices.

          TRAYNOR, JUSTICE

         In a report that was adopted by the Court of Chancery, a Master in Chancery held that books and records produced to a stockholder under Section 220 of the Delaware General Corporation Law[1] are "presumptively subject to a 'reasonable confidentiality order.'"[2] And in response to the stockholder's request for a time limitation on such a confidentiality order, the Master responded that, because the stockholder had not demonstrated the existence of exigent circumstances, confidentiality should be maintained "indefinitely, unless and until the stockholder files suit, at which point confidentiality would be governed by the applicable court rules."[3] After the Court of Chancery adopted the Master's Report, the stockholder appealed.

         We hold that, although the Court of Chancery may-and typically does- condition Section 220 inspections on the entry of a reasonable confidentiality order, such inspections are not subject to a presumption of confidentiality. We further hold that when the court, in the exercise of its discretion, enters a confidentiality order, the order's temporal duration is not dependent on a showing of the absence of exigent circumstances by the stockholder. Rather, the Court of Chancery should weigh the stockholder's legitimate interests in free communication against the corporation's legitimate interests in confidentiality. Nevertheless, although we disagree with the Master's formulation of the principles governing confidentiality in the Section 220 inspection context, the confidentiality order that the Court of Chancery ultimately entered seems to us to be within the range of reasonableness- and, thus, not an abuse of discretion-given the facts and circumstances of this case. We therefore affirm the Court of Chancery's order and final judgment.

         I. BACKGROUND

         Boast is an apparel brand created by tennis player Bill St. John in 1973. Although Boast, which featured a Japanese maple leaf logo, [4] enjoyed some success in the 70s and 80s, St. John retired the brand in the 90s.

         In 2010, Alex Tiger-the plaintiff in this suit-and John Dowling decided to revive the Boast Brand. The pair started Boast Investors, LLC, which would later be converted into the named defendant in this case, BAI Capital Holdings, Inc. ("BAI"), as well as Branded Boast, LLC. Boast Investors owned a majority interest in Branded Boast, which in turn purchased the Boast intellectual property from St. John's holding company, Boast, Inc.

         Over the next several years, Tiger and Dowling had several conflicts in managing Boast Investors. In particular, Dowling increased his equity stake in Boast Investors and its successors through a series of mechanisms that Tiger opposed. First, Dowling loaned $4 million to Boast Investors. Then, after an abortive attempt, Dowling succeeded on his second try at amending Boast Investors' operating agreement and converted his loans into additional member units in Boast Investors. As a part of this conversion, other members were required to contribute additional capital in a preemptive rights offering or their stakes would be diluted. Tiger objected to this offering and did not participate. In November 2014, Boast Investors converted itself from a limited liability company to the corporation that became BAI.[5] Tiger and Dowling attempted to resolve their disagreements through negotiations but were not able to do so.

         On December 9, 2014, Tiger delivered his first Section 220 demand to BAI, requesting 22 categories of documents. The stated purposes of Tiger's inspection demand were to, among other things, value his shares, investigate potential mismanagement, and investigate director independence. BAI responded with a proposed confidentiality agreement. This first proposed agreement would have barred Tiger from using BAI documents in subsequent litigation. Tiger rejected this proposal. BAI made a revised proposal that prohibited use of the documents in litigation other than derivative actions. Tiger then requested that BAI produce all documents that were not confidential, but BAI demurred.

         On February 24, 2017, Tiger sent a second Section 220 demand to BAI. BAI's CFO offered Tiger the opportunity to review Tiger's demanded documents but once again asked Tiger to sign a confidentiality agreement. As before, Tiger asked BAI to produce all non-confidential materials, but BAI's CFO once more asked for a confidentiality agreement. The parties negotiated over the confidentiality agreement but were unable to come to an agreement.

         In October 2017, BAI gave notice under 8 Del. C. § 228(e) to non-consenting stockholders that it had sold substantially all of its assets to Boast Brands Group, LLC, a company owned by a group of clothing and investment companies. In consideration for the sale, BAI received approximately $1 million in cash plus a 10% equity stake in Boast Brands Group.

         Tiger then filed a Section 220 action against BAI in the Court of Chancery, [6]demanding access to the books and records he had specified in his 2017 demand, which Tiger had amended on May 8, 2017. The case was assigned to a Master in Chancery.

         The primary dispute between the parties before the Court of Chancery was the scope of Tiger's confidentiality obligations upon BAI's production of the relevant books and records. Tiger suggested a one-year confidentiality order, while BAI, citing previous cases in which the Court of Chancery issued three-year confidentiality orders on financial documents, pushed for a "default three-year period of confidentiality."[7]

         After considering the parties' respective positions, the Master in Chancery submitted her report on July 23, 2018, recommending an indefinite confidentiality period lasting up to and until Tiger filed suit based on facts learned through his inspection, after which confidentiality would be controlled by the applicable court rules. Tiger took exception to the Master's Report, but the Master-having become Vice Chancellor-rejected Tiger's exceptions and adopted the Master's Report, including the indefinite confidentiality period.[8]

         Tiger appealed, arguing that the indefinite nature of the confidentiality order constituted an abuse of discretion and that the Court of Chancery failed to account for his status as a market participant.

         II. STANDARD OF REVIEW

         "In a § 220 action, we review for abuse of discretion the Court of Chancery's determination of both the scope of relief and any limitations or conditions on that relief. This standard of review is highly deferential. . . . Delaware courts have viewed the determination of whether to impose a condition or limitation on an inspection as inherently case-by-case and fact[-]specific. Questions of law, however, are reviewed de novo."[9]

         "This Court may affirm on the basis of a different rationale than that which was articulated by the trial court[] if the issue was fairly presented to the trial court."[10]

         III. ...


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