James Rivest v. Hauppauge Digital, Inc.

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

JAMES RIVEST, )
)
Plaintiff, )
)
v. ) C.A. No. 2019-0848-PWG
)
HAUPPAUGE DIGITAL, INC., )
)
Defendant. )

MASTER’S REPORT

Date Submitted: October 26, 2021
Final Report January 24, 2022

Marcus E. Montejo, PRICKETT, JONES & ELLIOT, Wilmington, Delaware,
Attorney for Plaintiff.

Douglas J. Cummings, KOLLIAS LAW LLC, Wilmington, Delaware, Attorney for
Defendant.

GRIFFIN, M.
 This post-trial report concludes a highly-litigated books and records action

brought under Section 220 of the Delaware General Corporate Law (“DGCL”) by a

stockholder against a company whose common stock once traded in the public

markets but has since gone “dark.” The company’s stock is still held by members

of the public, and the company has made no disclosures to stockholders since 2014.

The stockholder seeks to inspect the company’s books and records to value his stock

in the company. The company claims that the stockholder’s purpose is improper

and, if the inspection is allowed, that the strongest confidentiality protections

allowable should be ordered. The stockholder, relying upon the Delaware Supreme

Court’s holding in Tiger v. Boast Apparel, Inc. [“Tiger”],1 argues that no

confidentiality restrictions should be imposed. I conclude that, under Tiger, the

company has shown a need for confidentiality, and recommend that the Court order

that the requested information be produced subject to a two-year confidentiality

restriction. This is a final report.

1
214 A.3d 933 (Del. 2019).

1
 I. Factual Background2

A. The Parties

This matter is an action for the production of the books and records of

Hauppauge Digital, Inc. (“Company”) brought by James Rivest (“Rivest”), a

stockholder in the Company, under Section 220 of the DGCL.3 The Company

develops, manufactures, and sells personal computer-based television tuners, data

broadcast receivers and video capture products.4 The Company was incorporated in

the State of Delaware on August 2, 1994.5 Kenneth Plotkin (“Plotkin”) is a co-

founder of the Company, and the Company’s sole director and chief executive

officer.6 Gerald Tucciarone (“Tucciarone”) is the Company’s chief financial officer,

secretary, and investor relations representative.7

2
I refer to the Joint Trial Exhibits as “JX.” I refer to the transcript of the October 26, 2021
trial as “Trial Tr.” and to the transcript of the October 14, 2021 pre-trial conference as
“PTC Tr.” The Pre-Trial Stipulation, D.I. 47, is referred to as “Stip.”
3
Docket Item (“D.I.”) 1.
4
Stip., ¶ 7; Trial Tr. 83:14-24.
5
Stip., ¶ 6. The Company has two wholly-owned subsidiaries, Hauppauge Computer
Works, Inc. and HCW Distributing Corp., which were both incorporated in the State of
New York in the 1980s. Id.
6
Id., ¶ 10. Plotkin has served as a director of the Company since it was incorporated. Id.
7
Id., ¶ 11; Trial Tr. 165:11-12.

2
 On January 10, 1995, the Company completed a public offering of its common

stock.8 Prior to July 28, 2014, the Company’s stock traded on a national securities

exchange.9 Between 1995 and 2014, the Company filed regular public disclosures

with the Securities and Exchange Commission (“SEC”).10 Between 2010 and 2011,

the Company suffered a “pretty large decline in sales due to the loss of business

with” two large customers.11 As a result, the Company’s auditors issued a “going

concern” opinion in the Company’s 2013 10-K report, indicating that, due to a

“history of operating losses[, ] there can be no assurance that [the Company] will be

profitable in the future,”12 or that the Company will generate enough cash internally

to satisfy its cash needs for the next 12 months.13 The going concern warning

adversely impacted the Company’s operations, with manufacturers and suppliers

restricting the Company’s access to credit.14 Plotkin testified that the Company “lost

8
JX-001. On October 31, 2006, the Company filed a registration for a secondary offering.
JX-002.
9
Stip., ¶ 12.
10
See generally EDGAR Entity Landing Page Hauppauge Digital Inc, Sec. & Exch.
Comm’n, https://www.sec.gov/edgar/browse/?CIK=930803 (last visited January 23,
2022). This Court may, in appropriate circumstances, take judicial notice of a
corporation’s public filings with the SEC. See In re General Motors (Hughes) S’holder
Litig., 897 A.2d 162, 170-171 (Del. 2006); In re Primedia, Inc. S’holder Litig., 2013 WL
6797114, at *8-11 (Del. Ch. Dec. 20, 2013).
11
Id. 85:13-17.
12
Id. 87:12-16; see also JX-039, at 27.
13
Trial Tr. 173:7-18; JX-039, at 28.
14
Trial Tr. 178:6-18. The Company’s Asian-based suppliers reduced the amount of credit
available to the Company for purchasing products to match the amount of credit insurance
3
business because of those financials.”15 He relayed an incident in January of 2014

meeting with a buyer for one of the Company’s largest purchasers related to the

buyer’s intention to remove the Company’s products from its shelves.16 During the

meeting, Plotkin saw copies of the Company’s 10-K reports, as well as samples of a

competitor’s products, on the buyer’s desk.17

In discussions with the Company’s securities’ attorney on ways to cut the

Company’s expenses, the Company’s securities attorney suggested de-registering as

a public company to eliminate the costs associated with public filings, etc.18 Plotkin

testified that the intention was to “go dark for a period of time, with the goal of

getting the company righted so that we could … start to publish our financials at

some point in the future.”19 On July 28, 2014, the Company filed a Form 15 with

the SEC, representing that it had fewer than 300 stockholders of record, so that it

was no longer subject to the mandatory reporting requirements of the federal

that the suppliers could obtain on the receivables owed by the Company. Id. 182:1-21.
However, these suppliers continued to cut the Company’s credit as the Company did less
business with them, even after the Company stopped making public financial disclosures
under SEC regulations. Id. 183:6-14.
15
Id. 96:4-7.
16
Id. 93:9-12.
17
Id. 93:15-18. Plotkin testified that he and the buyer discussed that the Company’s
products were going to be replaced by the competitor’s products, but did not discuss the
Company’s finances. Id. 94:3-10.
18
Id. 95:7-18.
19
Id. 97:4-8.

4
securities laws.20 From July 28, 2014 until September 28, 2021, the Company’s

stock were listed on the Pinksheets as a stock traded on the over-the-counter

(“OTC”) markets.21 Since July 28, 2014, the Company has made no public

disclosures or disclosures to its stockholders.22

Rivest is a resident of Florida and a beneficial owner of common stock of the

Company.23 Rivest ran an investment partnership for about 10 years before

retiring.24 He described his investment strategy as “deep value investments and

special situation investing,” in which he buys stock at a lower market price than its

intrinsic value or in special situations, such as spin-offs, tender offers, and

bankruptcies.25 Rivest first invested in the Company after reading about the

Company on a blog devoted to “dark” companies that traded on the OTC markets.26

He looked at the Company’s old SEC filings, noted that the Company had “good

sales years ago,” and concluded that the Company was “incredibly cheap.”27 As part

20
JX-003.
21
Stip., ¶ 14.
22
JX-027, 3-4; Trial Tr. 153:23-154:2; id. 170:1-14; see also JX-004, at 3-4 (conversation
between an investor and Tucciarone, in which Tucciarone stated that the Company would
not make financial disclosures to a stockholder).
23
Stip., ¶ 1.
24
Trial Tr. 12:18-23. Rivest has limited to no formal education in finance or investing. Id.
12:7-15.
25
Id. 20:7-8; id. 20:15-22.
26
Id. 22:16-23:24; see also JX-004.
27
Trial Tr. 24:4-13.

5
of his investment strategy with OTC companies, Rivest would typically buy a few

shares of a corporation’s stock, and send a Section 220 demand to the corporation

seeking financial information.28

B. Rivest’s Section 220 Demands

On July 29, 2019, Rivest mailed to the Company’s principal place of business

in Hauppauge, New York via certified mail a letter demanding an inspection of the

books and records of the Company to value his stock holdings (“July 2019

Demand”).29 Rivest, who was not represented by counsel at that time, testified that

he received a return receipt signed by Plotkin but no longer has it.30 Plotkin testified

that he had no record of receiving the July 2019 Demand.31 The Company did not

respond to the July 2019 Demand.32

On October 8, 2019, Rivest, through his counsel, sent to the Company’s

principal place of business in Hauppauge, New York via email and Fedex a letter

demanding the right to inspect the books and records of the Company (“October

28
Id. 26:24-27:3; id. 27:15-18; see also JX-029, at 12.
29
JX-005; Trial Tr. 28:11-20.
30
Trial Tr. 28:23-29:6; id. 29:18-20.
31
Id. 120:14-23.
32
Id. 29:12-16.

6
2019 Demand”).33 Rivest stated that he sought to value his stock and inspect two

categories of books and records:

(1) Monthly, quarterly and annual financial statements and financial reports,
including income statements, balance sheets, statements of cash flow and
all similar documents for the Company for the years 2016, 2017, and 2018.

(2) Appraisals, valuations or analyses mentioning or otherwise
referring to or relating to the value of the Company, its stock or any
of its assets.34

And, on April 24, 2020, Rivest sent to the Company’s principal place of

business in Hauppauge, New York via email and Fedex a letter demanding the right

to inspect the books and records of the Company (“April 2020 Demand”), in order

to value his stock, and sought an additional category of books and records:

Monthly, quarterly and annual financial statements and financial
reports, whether audited or not, including income statements, balance
sheets statements of cash flow, budgets, forecasts or projections and all
similar documents for the company for the years 2019 and 2020.35

C. The New SEC Rule

On September 25, 2019, the SEC issued a notice of proposed rulemaking,

proposing a new rule under the Securities and Exchange Act of 1934 regarding

publication or submission of quotations in the OTC market without specified

33
JX-008.
34
Id.
35
JX-010.

7
information.36 On October 27, 2020, the SEC issued a final rule pursuant to that

notice of proposed rulemaking (“New SEC Rule”), which became effective on

December 28, 2020,37 and had a compliance date of September 28, 2021.38 The

purpose of the New SEC Rule is to “set[] out certain requirements for a broker-dealer

seeking to initiate (or resume) quotations for securities in the OTC market.”39

For the stock of companies traded on the OTC markets, the New SEC Rule

makes it unlawful for a broker-dealer to publish a quotation unless the broker-dealer

has current and publicly available information about the company in its records.40

“Current” means information that is accurate within 12 months of publication or

submission of the quotation, including the company’s most recent financial

36
See Publication or Submission of Quotations Without Specified Information, 84 Fed.
Reg. 58206 (proposed Oct. 30, 2019).
37
See Publication or Submission of Quotations without Specified Information, 85 Fed.
Reg. 68124 (Oct. 27, 2020), codified at 17 C.F.R. § 240.15c2-11(a)(1).
38
85 Fed. Reg. at 68172.
39
Id. at 68124. The motivating concern behind this New SEC Rule was that “no or limited
current public information [is] available about certain issues of quoted OTC securities” and
broker-dealers, as defined by the Securities and Exchange Act of 1934, could manipulate
market prices in the OTC markets because “broker-dealers play an integral role in
facilitating investor access to OTC securities.” Id. at 68125.
40
17 C.F.R. § 240.15c2-11(a)(1)(i)(B), (b)(5)(i), (b)(5)(ii). There is a “piggyback
exception,” which “allows a broker-dealer to rely on the quotations of another broker-
dealer that initially complied with the information review requirement … so long as there
are no more than four business days in succession without a [compliant] quote.” 85 Fed.
Reg. at 68126; see also 17 C.F.R. § 240.15c2-11(f)(3).

8
statements and similar financial information for the two preceding fiscal years.41 By

its own terms, the New SEC Rule only regulates broker-dealers and imposes no

sanction on the corporations whose stock is traded on the OTC markets.42

Rivest filed a comment in response to the SEC’s September 25, 2019 notice

of proposed rulemaking (“Comment”), expressing his disagreement with the

proposed rule.43 He described the then-state of the OTC market as “caveat emptor,”

or let the buyer beware, and argued that cutting off retail investor access to trading

on the OTC markets would be a “draconian solution to combatting the fraudulent

and manipulative schemes targeting retail investors.”44 Rivest did not mention his

holdings in the Company or this litigation.45 The SEC’s notice of final rulemaking

specifically addressed the Comment.46

Since the New SEC Rule’s compliance date of September 28, 2021, the

Company’s common stock has been removed from the Pinksheets on the OTC

41
Id. § 240.15c2-11(e)(2)(i), (b)(5)(i). The balance sheet included in this information may
be up to 16 months old. Id. § 240.15c2-11(b)(5)(i)(L).
42
17 C.F.R. § 240.15c2-11(a)(1).
43
JX-007. In the Comment, Rivest expressed his opinion that “[t]he proposed rule would
be a disaster for investors who invest in legitimate OTC companies that provide little to no
public information.” Id., at 1.
44
Id., at 2.
45
See generally JX-007.
46
See generally Publication or Submission of Quotations Without Specified Information,
85 Fed. Reg. 68124 (Oct. 27, 2020).

9
Markets.47 Under the New SEC Rule, the Company’s stock is only trading in the

OTC “Expert Markets” because of a lack of currently available public information.48

D. Procedural History

On October 24, 2019, Rivest filed this action.49 The Company was served

but failed to timely respond.50 On December 4, 2019, Rivest moved for default

judgment against the Company and, when no response was filed by the Company,

default judgment was entered, on April 24, 2020 at 9:50 a.m., against the Company.51

Hours later, at 2:30 p.m. on April 24, 2020, the Court received a letter from Plotkin,

purporting to represent the Company pro se, in response to Rivest’s default judgment

motion.52 The Company subsequently retained Delaware counsel and moved to

vacate the default judgment, arguing excusable neglect and that it had a meritorious

argument that the Section 220 production must be subject to confidentiality

restrictions.53 On August 3, 2020, the Court vacated the default judgment, finding

47
JX-038.
48
Id.; Trial Tr. 41:19-42:3.
49
D.I. 1.
50
D.I. 5.
51
D.I. 11.
52
D.I. 13. The Court informed Plotkin that a corporation could only be represented before
a court by a licensed attorney but allowed the Company the opportunity to retain Delaware
counsel. D.I. 18; D.I.19; D.I. 22.
53
D.I. 21; D.I. 23.

10
that the neglect in response was excusable and that the Company had cited sufficient

evidence to raise the issue of confidentiality.54

On April 21, 2021, the Court entered a case scheduling order.55 On August

17, 2021, Rivest moved to supplement his pleading and add the April 2020 Demand

to the litigation.56 The Company opposed this motion, arguing futility.57 On

September 21, 2021, the Court granted the motion to supplement the pleadings,

holding that Defendant’s futility argument went to the merits and that the interests

of justice would be best served by a full adjudication of the parties’ disputes at trial.58

Rivest filed his supplemented complaint on September 27, 2021.59

On September 17, 2021, the Company moved for summary judgment

(“Motion”), arguing that, on undisputed facts, Rivest could not establish a proper

purpose.60 In the Motion, the Company raised for the first time in this litigation the

New SEC Rule.61 On September 21, 2021, I denied the Motion without prejudice to

the Company’s arguments, finding that summary judgment would not obviate the

54
D.I. 28, adopted D.I. 29 (Aug. 11, 2020).
55
D.I. 36.
56
D.I. 39.
57
D.I. 40.
58
D.I. 42.
59
D.I. 45.
60
D.I. 40.
61
Id.; see also PTC Tr. 13:12-23.

11
need for trial and that briefing on the Motion could not be accommodated, given the

proximity to trial and pre-trial deadlines.62

The parties filed their pre-trial stipulation on September 30, 2021.63 On

October 7, 2021, three hours before the deadline to file pre-trial briefing, the parties

filed a stipulated request to extend the pre-trial briefing deadline to October 12,

2021.64 I denied this request but granted an extension to October 8, 2021 at 2:00

p.m.65 At 12:47 p.m. on October 8, 2021, the Company filed an Emergency Motion

to Amend the Scheduling Order, for Relief from Order, or, in the Alternative, to

Continue Trial (“Emergency Motion”), arguing unfair surprise and discovery

violations by Rivest and requesting a continuance so that the Company could fully

brief its previously-denied summary judgment motion.66 Rivest filed his pre-trial

brief before the deadline on October 8, 2021.67 I requested further information from

the Company so that I could address the Emergency Motion at the already-scheduled

pre-trial conference.68

62
D.I. 41. The Motion was filed “about five weeks prior to trial and days before some pre-
trial filing deadlines occur[red].” Id.
63
D.I. 47.
64
D.I. 48.
65
D.I. 49.
66
D.I. 50.
67
D.I. 51.
68
D.I. 53.

12
 At the October 14, 2021 pre-trial conference, I denied the Company’s

Emergency Motion, its application to seal the courtroom during the evidentiary

hearing, and its request to designate both Plotkin and Tucciarone as corporate

representatives.69 An evidentiary hearing took place on October 26, 2021.70

II. Analysis

“Section 220(c) provides that stockholders who seek to inspect a corporation’s

books and records must establish that (1) such stockholder is a stockholder; (2) such

stockholder has complied with Section 220 respecting the form and manner of

making demand for inspection of such documents; and (3) the inspection such

stockholder seeks is for a proper purpose.”71 The parties have stipulated that Rivest

is a stockholder of the Company.72 The parties do not dispute the form and manner

69
D.I. 56.
70
D.I. 59.
71
AmerisourceBergen Corp. v. Lebanon Cty. Empls. Ret’ Fund, 243 A.3d 417, 425 (Del.
2020) (cleaned up).
72
See Stip., ¶ 1.

13
of the Rivest’s demands,73 or the scope of inspection.74 The parties dispute whether

Rivest has established a proper purpose and whether any confidentiality restrictions

should attach to the inspection rights.75

73
At the pre-trial conference, Rivest represented that he was not pursuing relief under the
July 2019 Demand. See PTC Tr. 74:22-23. At trial, the Company indicated it was not
going to pursue any claims regarding the sufficiency of the October 2019 and April 2020
Demands. See Trial Tr. 73:15-19. A Section 220 demand “shall state the person’s status
as a stockholder, be accompanied by documentary evidence of beneficial ownership of the
stock, and state that such documentary evidence is a true and correct copy of what it
purports to be.” 8 Del. C. § 220(b). “The demand under oath shall be directed to the
corporation at its registered office in this State or at its principal place of business.” Id.
Both the October 2019 and April 2020 Demands were made under oath, delivered to the
Company’s principal place of business, and provided a proximate E*TRADE account
statement showing Rivest’s holdings in the Company’s stock. See JX-008; JX-010. See
Jacob v. Bloom Energy Corp., 2021 WL 733438, at *5 (Del. Ch. Feb. 25, 2021) (it is the
stockholder’s burden “to provide proper documentary evidence of beneficial ownership of
stock at a point proximate to the date of his demand”); Amalgamated Bank v. Yahoo! Inc.,
132 A.3d 752, 776 (Del. Ch. 2016), abrogated in part on other grounds by Tiger v. Boast
Apparel, Inc., 214 A.3d 933 (Del. 2019). Therefore, the October 2019 and April 2020
Demands were sufficient for a Section 220 demand.
74
The April 2020 Demand sought budgets, forecasts and projections, in addition to
financial statements and reports, for 2019 and 2020. See JX-010. At the pre-trial
conference, the Company indicated that it would contest the scope related to forward-
looking documents. PTC Tr. 46:4-8. At the start of trial, Rivest indicated he was limiting
his demands to historical financial statements or monthly, quarterly, and annual financial
statements for periods that closed during fiscal years 2016 through 2020 (not projections,
budgets, forecasts, or appraisals). Trial Tr. 5:5-14; id. 6:24-7:19. The parties did not pursue
arguments regarding scope during trial. I note that the testimony of Plotkin and Tucciarone
indicated that the Company does not prepare monthly or audited statements. Id. 148:14-
22; id. 179:23-180:2.
75
See Stip., ¶¶ 17-41.

14
 A. Rivest has a Proper Purpose

Rivest argues that he has a proper purpose in valuing his stock holdings in the

Company.76 The Company challenges Rivest’s valuation purpose, relying on the

New SEC Rule and Rivest’s discovery responses to argue that Rivest’s actual

purpose is to subvert the New SEC Rule and to circumvent or unfairly manipulate

federal securities law.77

A “proper purpose” is “a purpose related to such person’s interest as a

stockholder.”78 The stockholder must establish this proper purpose by a

preponderance of the evidence.79 “Myriad proper purposes have been accepted

under Delaware law including: the determination of the value of one’s equity

holdings …”80 This Court has recognized that minority stockholders in companies

not subject to reporting requirements by the SEC “may … have a legitimate need to

inspect the corporation’s books and records to value their investment, in order to

decide whether to buy additional shares, sell their shares, or take some other action

76
D.I. 51, at 1.
77
Trial Tr. 227:2-229:24; D.I. 40, ¶¶ 20-23, 37, 39.
78
8 Del. C. § 220(b).
79
See Seinfeld v. Verizon Commc’ns, Inc., 909 A.2d 117, 121 (Del. 2006).
80
AmerisourceBergen Corp. v. Lebanon Cty. Empls. Ret’ Fund, 243 A.3d 417, 425 (Del.
2020) (internal quotation marks and citations omitted); see also Woods v. Sahara Enters.,
Inc., 238 A.3d 879, 889-90 (Del. Ch. 2020) (quoting Cty. of Westland Police & Fire Ret.
Sys. v. Axcelis Techs., Inc., 1 A.3d 281, 289 n.30 (Del. 2010)).

15
to protect their investment.”81 To establish a proper purpose, “Delaware law does

not require that a stockholder establish both a proper purpose for seeking inspection

… and an end to which the fruits of the inspection will be put.”82 “[O]nce a

stockholder has identified a proper purpose, such as valuing shares, the burden shifts

to the corporation to prove that the stockholder’s avowed purpose is not her actual

purpose and that her actual purpose for conducting the inspection is improper.”83

The corporation “may not rebut a proper purpose solely by demonstrating that a

secondary improper purpose or additional ulterior motive also exists.”84 Instead, “in

order to succeed, [the Company] must prove that [Rivest] pursued [his] claim under

false pretenses, and [his] primary purpose is indeed improper.”85

81
Thomas & Betts Corp. v. Leviton Mfg. Co., 685 A.2d 702, 713 (Del. Ch. 1995).
82
Woods, 238 A.3d at 891; see also AmerisourceBergen Corp., 243 A.3d at 430.
Woods, 238 A.3d at 891; AmerisourceBergen Corp., 243 A.3d at 429 (“[A] corporation
83

may challenge the bona fides of a stockholder’s stated purpose and present evidence from
which the court can infer that the stockholder’s stated purpose is not its actual purpose.”).
84
Caspian Select Credit Master Fund Ltd. v. Key Plastics Corp., 2014 WL 686308, at *4
(Del. Ch. Feb. 24, 2014); Carapico v. Philadelphia Stock Exch., Inc., 791 A.2d 787, 791
(Del. Ch. 2000) (“[t]he existence of a secondary purpose does not defeat plaintiff’s claim
that his purpose is bona fide”).
85
Woods, 238 A.3d at 891 (citing Pershing Square, L.P. v. Ceridian Corp., 923 A.2d 810,
817 (Del. Ch. 2007)).

16
 Rivest credibly testified that he wanted to value his stock holdings.86 He

further explained the methodology that he would use in valuing his holdings.87

Based upon this testimony, I conclude that Rivest has a bona fide purpose of valuing

his holdings in the Company’s stock. His need to inspect the Company’s books and

records is heightened by the fact that the Company makes no public disclosures or

disclosures to stockholders.88 It is well-settled that Delaware law recognizes that

valuing stock holdings is a proper purpose for a Section 220 demand.89 Thus, Rivest

has shown a proper purpose.

The Company argues that Rivest’s actual purpose is “to circumvent or unfairly

take advantage of” the New SEC Rule and to share information with the marketplace

for his personal profit at the Company’s expense.90 To succeed, the Company must

prove that Rivest pursued his claims under false pretenses, and that his primary

86
Trial Tr. 75:19-76:15; see also JX-029, at 7. Rivest has consistently stated that he wants
to value his stock holdings using the information that he would gather from the requested
production. See JX-005; JX-008; JX-010.
87
Trial Tr. 75:22-77:9; see also JX-029, at 7. Rivest testified that he looks “at the income
statement, the cash flow statements, and the balance sheet, and then [determines] if the
price is much cheaper than the actual intrinsic value of the company.” Trial Tr. 76:9-13.
88
Trial Tr. 166: 17-19; see Thomas & Betts Corp. v. Leviton Mfg. Co., 685 A.2d 702, 713
(Del. Ch. 1995).
89
See AmerisourceBergen Corp. v. Lebanon Cty. Empls. Ret’ Fund, 243 A.3d 417, 425
(Del. 2020); Woods, 238 A.3d at 889 (citation omitted).
90
Trial Tr. 227:2-24.

17
purpose is improper. “Such a showing is fact intensive and difficult to establish.”91

Rivest has indicated he intends to share the Company’s financial information “with

market participants in the public market for the Company’s stock to assess the

market value of the Company’s stock,” if it is legal to do so.92 That intention does

not create a question whether Rivest actually wants to value his stock holdings, or

show that his purpose is improper; instead, it confirms that Rivest intends to “assess

the market value of the Company’s stock.”93 The Company’s speculation that

Rivest’s real purpose is to circumvent the New SEC Rule and harm the Company is

not supported by the evidence.94 Even assuming arguendo that Rivest’s actions

related to the New SEC Rule somehow create an improper purpose, the Company

has not met its burden of showing that Rivest has pursued valuation under false

pretenses. This action was commenced before the New SEC Rule became effective

or its compliance date,95 and it appears Rivest intended to pursue a Section 220

91
Woods, 238 A.3d at 891 (quoting Pershing Square, L.P. v. Ceridian Corp., 923 A.2d
810, 817 (Del. Ch. 2007)).
92
Stip, ¶ 4; Trial Tr. 68:1-5.
93
Stip, ¶ 4; Trial Tr. 68:1-5.
94
It is not for this Court to decide, in this instance, whether Rivest’s future actions, which
are speculative, will violate federal securities laws. See Southpaw Credit Opportunity
Master Fund LP v. Advanced Batter Techs., Inc., 2015 WL 915486, at *11 (Del. Ch. Feb
26, 2015).
95
See Publication or Submission of Quotations Without Specified Information, 85 Fed.
Reg. 68124 (Oct. 27, 2020).

18
inspection even before the New SEC Rule was proposed.96 Rivest’s Comment may

demonstrate that he disagrees with the SEC policies in the New SEC Rule,97 but I

fail to see how that is relevant in determining whether Rivest has stated a proper

purpose for a Section 220 demand under the DGCL.98 Here, I find there is sufficient

evidence to show Rivest has established a proper purpose – the valuation of his

holdings of the Company’s stock – and the Company has not met its burden of

showing that Rivest is pursuing his claim under false pretenses.99

96
Compare JX-005 (July 2019 Demand) with Publication or Submission of Quotations
Without Specified Information, 84 Fed. Reg. 58206 (proposed Oct. 30, 2019). I recognize
that the Company indicated it had no record of receiving the July 2019 Demand. Trial Tr.
120:14-23. And, Rivest is not pursuing relief under the July 2019 Demand. PTC Tr. 74:22-
23. I rely upon the July 2019 Demand only to show that Rivest intended to value his stock
holdings before the SEC issued its notice of proposed rulemaking for the New SEC Rule.
Further, Rivest testified that he typically filed 220 demands with OTC companies in which
he held stock as part of his investment strategy. See n. 28 supra and accompanying text.
97
See JX-007; JX-060; JX-061; JX-062; Trial Tr. 229:3-12.
98
Any citizen has the right to petition a federal rulemaking agency and to participate in the
rulemaking process by filing comments to which that agency must respond. See 5 U.S.C.
§ 551 et seq. That right is separate from a stockholder’s rights under Section 220 and is
not at issue here.
99
Prior to trial, the Company had suggested that Rivest sought to harass the Company with
his Section 220 demand. JX-027, at 5. This Court has recognized that harassment can be
an improper purpose for a Section 220 demand. See, e.g., Alexandria Venture Invs., LLC
v. Verseau Therapeutics, Inc., 2020 WL 7422068, at *5 (Del. Ch. Dec. 18, 2020). But, I
do not find that the factual circumstances that support harassment as an improper purpose
are present here. Cf. Georgia Notes 18, LLC v. Net Element, Inc., 2021 WL 5368651, at *4
(Del. Ch. Nov. 18, 2021) (stockholder’s actual purpose was pre-litigation discovery to
advance its non-stockholder claims against the corporation).

19
B. Confidential Treatment of Section 220 Documents

The Company argues that Rivest is attempting to use Section 220 to “pry open

a non-public company’s financial records for all to devour,” and that he will use the

financial information to circumvent the New SEC Rule and undermine federal

securities policy.100 It further argues that “exceptional circumstances” require the

imposition of the “strongest and most restrictive confidentiality protections” for its

financial information, or “[f]ive years of confidentiality protection.”101 Specifically,

the Company points to the adverse effects that past disclosures have produced; the

Company’s “particular vulnerability;” and the cost of litigating a breach of a

nondisclosure agreement.102

In response, Rivest relies on the Supreme Court’s ruling in Tiger103 to argue

that no confidentiality treatment is warranted for the books and records to be

produced.104 He asserts that there is no need for confidential treatment because

partial federal tax returns for the Company are part of the public record in litigation

in the State of New York, and because the books and records requested are stale.105

100
D.I. 40, ¶ 37; Trial Tr. 227:2-21; id. 240:12-16.
101
Trial Tr. 228:17-229:2; id. 245:5-7; id. 251:3-16.
102
Id. 242:1-7; id. 233:12-234:5; id. 249:1-21.
103
214 A.3d 933 (Del. 2019).
104
D.I. 51, at 26-28.
105
Id., at 28-29.

20
Rivest contends that his interest in free communications outweighs any Company

interest in confidentiality, and challenges whether the Company has shown a strong,

legitimate interest in confidentiality.106

“There is no presumption of confidentiality in Section 220 productions.”107

“[T]he Court of Chancery certainly has the power to impose reasonable

confidentiality restrictions.”108 But, before ordering confidential treatment, the

Court “must assess and compare the benefits and harms when determining the initial

degree and duration of confidentiality.”109 This imposes a burden on the party

seeking confidential treatment, but “the targets of Section 220 demands will often

106
Trial Tr. 208:8-209:9.; id. 211:20-24 (“[W]hatever harm was put upon [the Company]
by a competitor was about rumors and not financial statements.”). Rivest further asserts
that allowing confidentiality in this instance is contrary to societal good because the Court
would be “providing unregistered public companies some type of competitive advantage
over registered public companies.” Id. 212:1-213:6. And that a public company, whether
registered or unregistered, “has no reasonable expectation in the confidentiality of its
historical financial statements.” Id. 202:19-21. In assessing Section 220 demands, this
Court considers whether a company treats its financial information as confidential. See
Southpaw Credit Opportunity Master Fund LP v. Advanced Battery Techs., Inc., 2015 WL
915486, at *10 (Del. Ch. Feb. 26, 2015). And, if a company “is not publicly reporting, it
is more akin to a private company for purposes of this analysis.” Id., at *9. Rivest asks that
I consider the societal benefits and the effect on competitive advantages if registered or
unregistered public companies receive different confidential treatment. I decline to
conduct that broader review and, instead, focus on the benefits and harms to the stockholder
and corporation in this case related to confidentiality protections.
107
Tiger, 214 A.3d 933, 939 (Del. 2019).
108
Id.
109
Id.; see also KT4 Partners LLC v. Palantir Techs. Inc., 203 A.3d 738, 760 (Del. 2019)
(“‘[C]aution is needed because use restrictions under § 220(c) have traditionally been tied
to case-specific factors.’” (quoting United Techs. Corp. v. Treppel, 109 A.3d 553, 561 (Del.
2014))).

21
be able to demonstrate that some degree of confidentiality is warranted where they

are asked to produce nonpublic information.”110 “[A] corporation need not show

specific harm that would result from disclosure before receiving confidentiality

treatment in a Section 220 case,” but the Court “cannot conclude reflexively that the

need [for confidentiality] is readily apparent.”111 In assessing the need for

confidential treatment, this Court seeks to tailor the confidentiality restrictions to the

fact-specific circumstances of each case.112

First, I consider the potential benefits to Rivest if he is allowed to make the

inspection subject to no confidentiality restrictions. Rivest has an interest in being

able to share the information he learns from the inspection with other investors who

may be interested in purchasing his holdings in the Company’s stock.113 Rivest also

argues that the Court should also consider the effect of the New SEC Rule and the

cost to him if he cannot disclose financial information so that a quotation for the

Company’s stock could be published on the OTC markets.114 This ability to publish

110
Tiger, 214 A.3d at 939.
111
Id. (internal quotation marks and citations omitted).
112
See generally Shaich v. Panera Hldgs. Corp., C.A. No. 2020-0271-MTZ (Del. Ch. Nov.
4, 2020) (TRANSCRIPT at 51-63); see also KT4 Partners LLC, 203 A.3d at 760.
113
Trial Tr. 40:19-41:9.
114
See id. 208:15-209:9; 17 C.F.R. § 240.15c2-11.

22
quotations for the Company’s stock might create a benefit to Rivest,115 but this Court

does not craft use and confidentiality restrictions on a Section 220 production based

upon the rights and restrictions found in federal securities laws.116

Next, I consider the harm to the Company if the financial statements produced

for the Section 220 are disclosed. The Company asserts that it is particularly

vulnerable because of its current financial position and would be damaged if vendors

cut its credit line.117 It alleges that past financial disclosures (through its 2013 10-K

report) resulted in adverse business effects.118 Previously, the Court set aside a

default judgment in consideration of the Company’s averment that “industry

competitors … have in the past used less-than-stellar financial reports to lure

115
Rivest argues that confidentiality longer than 12 months eliminates the stockholder’s
right under the New SEC Rule’s exception to “get a public bid-and-ask quote for the
shares,” with “a huge consequence to the stockholder.” Trial Tr. 208:19-209:3. This
consideration results from the interplay of the New SEC Rule with the pricing of stocks on
the OTC markets. Rivest testified that, in purchasing stocks in “dark” companies, he knows
that these stocks “are going to be less transparent” and riskier than other stocks, but that he
“can make some serious money.” Id. 25:14-21; see also n. 44 supra and accompanying
text. And, he chose to maintain the Company’s stock, even knowing that the New SEC
Rule was being put into place. As a stockholder holding stock in a dark company, he
assumes the risks associated with that ownership.
116
See Southpaw Credit Opportunity Master Fund LP v. Advanced Battery Techs., Inc.,
2015 WL 915486, at *11 (Del. Ch. Feb. 26, 2015) (“I do not believe ordering parties to
comply with federal law is consistent with the intent of Section 220. The inspection right
afforded to stockholders under Section 220 is an important feature of the Delaware General
Corporation Law, but it is a right entirely separate from the complex overlay of rights and
regulations created under the federal securities laws.”).
117
Trial Tr. 242:1-3; id. 249:1-9.
118
See id. 232:11-233:4.

23
business opportunities away from [the Company], resulting in a loss of

customers.”119 The evidence produced at trial showed that outside auditors put a

“going concern” warning on the Company’s 2013 publicly disclosed 10-K report,

which resulted in manufacturers and suppliers restricting the Company’s access to

credit.120 In meeting with a large customer about that customer’s decision to remove

the Company’s products from its shelves, Plotkin testified that he saw copies of the

Company’s 2013 10-K report on the customer’s desk, along with samples of a

competitor’s products, which, ultimately, replaced the Company’s products.121

Disclosure of limited financial information through the Section 220 production at

issue would present a different situation. The Company no longer has outside

auditors prepare financial statements, so financial information would not include any

going concern warning.122 Further, the evidence shows that, since the Company de-

registered and ended its mandatory reporting obligations, creditors have continued

to restrict the Company’s access to credit without comparable disclosures. 123 And,

some of the Company’s financial information was made public as part of unrelated

119
D.I. 23, ¶ 23; D.I. 28, at 8-9.
120
Trial Tr. 178:6-16; id. 182:1-21.
121
Id. 93:4-18; id. 74:11-15.
122
Id. 180:15-24.
123
Id. 183:6-14; JX-027, at 3; id., at 4 (the Company “did not disclose financial information
after July 28, 2014.”).

24
litigation in New York, with no evidence that competitors have used that information

against the Company.124 This evidence of harm to the Company is limited, but the

Company does not need to “show specific harm” to justify confidentiality.125

The Company also contends that confidentiality is necessary or appropriate

because Rivest can accomplish his valuation purpose under a confidentiality

agreement.126 This would seem to improperly shift the burden under Tiger away

from the Company, which may result in the reflexive conclusion that the Delaware

Supreme Court warned against.127

In addition, the Company claims that it cannot afford to go after Rivest for a

breach of any nondisclosure agreement.128 The evidence does not support a

conclusion that Rivest will breach court-ordered confidentiality, and a failure to

comply with such an order could be enforced by this Court and not require a separate

action.129

124
See JX-031; JX-032; JX-033; JX-034; Trial Tr. 183:15-22.
125
Tiger, 214 A.3d 933, 939 (Del. 2019) (internal quotation marks and citations omitted).
126
Trial Tr. 224:23-225:1; see also Stip., ¶ 15.
127
See Tiger, 214 A.3d at 939.
128
Trial Tr. 233:12-234:6.
129
Rivest testified that he had been accused of publishing nonpublic financials of a
deregistered OTC company on a website in the past. Id. 62:7-63:6. But there was no
evidence proving that he had done so. And, Rivest stated that he would share the
Company’s financial information with market participants to assess the market value of the
Company’s stock “[i]f it was legal to do so.” Id. 68:1-5.

25
 Finally, I consider Tucciarone’s testimony that if he came into the possession

of a competitor’s financial information showing poor performance, “[the Company]

would use it against one of our competitors.”130 Tucciarone’s admission depicts the

competitiveness of the environment in which the Company operates. His candor in

admitting that he would use a competitor’s poor financial performance against them

indicates that competitors would likewise use the Company’s financial information

against it to achieve whatever advantage the competitor could get.131 The evidence

suggests that, should the Company’s current nonpublic financial information fall

into the hands of a competitor, the Company may well face harm.132

130
Id. 184:16-17.
131
This is supported by the specific incident involving the loss of a major purchaser in
2014, although that evidence is less compelling because of its age. See id. 93:9-18.
132
The Company also suggested at times that Regulation FD under the Securities Exchange
Act of 1934 required confidentiality. Trial Tr. 111:5-112:22. At trial, the parties disputed
whether Regulation FD applied to the Company. Compare id. 98:12-100:13 with id. 111:9-
116:13. But, in its closing arguments, the Company took the position that Regulation FD
does not play into the harms and benefits analysis under Tiger. Id. 254:7-12. So I need not
consider the effects of Regulation FD, to the extent that it applies to the Company. I note,
though, that this Court has declined to consider the effects of Regulation FD in crafting use
and confidentiality restrictions on a Section 220 production. See Southpaw Credit
Opportunity Master Fund LP v. Advanced Battery Techs., Inc., 2015 WL 915486, at *11
(Del. Ch. Feb. 26, 2015) (“Whatever their obligations under Regulation FD, the parties
may independently assess those obligations and determine how to comply with them
without an order from this Court. In addition, I do not believe ordering parties to comply
with federal law is consistent with the intent of Section 220. The inspection right afforded
to stockholders under Section 220 is an important feature of the Delaware General
Corporation Law, but it is a right entirely separate from the complex overlay of rights and
regulations created under the federal securities laws.”).

26
 In conclusion, weighing all of the arguments concerning the benefits and

harms if confidentiality is imposed, I find there is sufficient evidence to support

limited confidentiality restrictions, but not of the duration that the Company

requests.

The next inquiry focuses on the duration of confidentiality protections.133 The

Company seeks the “strongest and most restrictive confidentiality protections,” or

“five years of confidentiality protection.”134 Rivest argues for no confidentiality

restrictions because the books and records requested are stale.135 The materiality of

financial information “lessens as it ages.”136 Courts have recognized the difficulty

in setting a precise “moment in time” when non-public financial information

becomes stale and have varied in their determinations as to when confidential

treatment becomes unnecessary.137 Based on the circumstances in this case

133
See Tiger, 214 A.3d 933, 939 (Del. 2019).
134
Trial Tr. 228:17-229:2; id. 245:5-7.
135
D.I. 51, at 28-29.
136
Ravenswood Inv. Co., L.P. v. Winmill & Co. Inc., 2014 WL 7451505, at *1 (Del. Ch.
Dec. 31, 2014).
137
See, e.g., id. (“financial information does not warrant confidential treatment after three
years from the date of the document or information”); Quantum Tech. Partners IV, LP v.
Ploom, Inc., 2014 WL 2156622, at *18 (Del. Ch. May 14, 2014) (upholding a five year
sunset provision for confidential designation since the information “likely will be so stale
that its competitive value will be non-existent”); Ad-Venture Cap. Partners, LP v. ISN
Software Corp., CA. No. 6618-VCG (Del. Ch. Mar. 5, 2012) (TRANSCRIPT at 7:1-6)
(“[I]t seems to me that it is likely that whatever the competitive value of the documents
that I have ordered disclosed is that it will be so significantly reduced over a two-year
period that that’s the appropriate length of time.”); see also Baker v. Sadiq, 2016 WL
27
involving a stockholder seeking to value his shares, I conclude that a two-year

confidentiality restriction is warranted. Information that is less than two years old

will be subject to a confidentiality restriction. Rivest has an interest in being able to

share the financial information he learns from the inspection with other investors

who may be interested in purchasing his holdings in the Company’s stock.138

However, this interest must be weighed against the recognized harm to the Company

in having its competitively sensitive information become publicly available.139 The

testimony about the Company at trial suggested that the Company’s financial

information will show a shift corresponding to the COVID-19 pandemic around

February of 2020.140 It appears that information predating February of 2020 would

have significantly less competitive value.141 Therefore, the financial information

produced by the Company that is less than two years old will be subject to a

confidentiality restriction.

4988427, at *2 (Del.Ch. June 8, 2016) (ORDER) (denying confidential designation of
financials “from more than three years ago” because of staleness); Southpaw Credit
Opportunity Master Fund LP v. Advanced Battery Techs., Inc., 2015 WL 915486, at *10
(Del. Ch. Feb. 26, 2015) (“I am skeptical that financial results dating back more than a year
are entitled to confidential treatment.”).
138
Trial Tr. 40:19-41:9.
139
Tiger, 214 A.3d 933, 939 (Del. 2019).
140
Trial Tr. 186:11-17.
141
See also id. 185:7-9.

28
 III. Conclusion

I recommend that the Court enter judgment in favor of Rivest and order the

inspection of the Company’s quarterly and annual financial statements and reports,

including cash flow statements, balance sheets and income statements, for years

2016 through 2020, subject to a confidentiality provision protecting financial

information less than two years old. Upon this Report becoming final, counsel are

directed to confer and submit an implementing order, a confidentiality agreement,

and a status report or briefing schedule regarding their attorneys’ fees claims. This

is a final Master’s Report, and exceptions may be taken under Court of Chancery

Rule 144(d)(1), with any party filing a notice of exceptions within eleven (11) days

of the date of this Report.142

The stays on the periods for taking exceptions to the September 21, 2021

Order denying the Company’s Motion for Summary Judgment,143 the September 21,

2021 Order granting Rivest’s Motion for Leave to File Supplement to the

Complaint,144 the October 14, 2021 bench ruling and final Master’s Report denying

142
I recognize that, by statute, this action is a summary proceeding and Rule 144(d)(2)’s
shortened three-day period for taking exceptions would ordinarily apply. See Mennen v.
Fiduciary Tr. Int’l of Del., 167 A.3d 507, 511 (Del. 2016). However, given the
circumstances and duration of these proceedings, I find it is appropriate to follow the
ordinary eleven-day schedule for taking exceptions.
143
D.I. 41.
144
D.I. 42.

29
(1) the Company’s Emergency Motion to Amend the Scheduling Order, for Relief

from Order, or, in the Alternative, to Continue Trial,145 and (2) the Company’s

application to seal the trial,146 are lifted, and exceptions on those matters shall also

be taken under Court of Chancery Rule 144(d)(1).

145
D.I. 56; PTC Tr. 30:19-38:9.
146
D.I. 56; PTC Tr. 85:1-86:14.

30