In this decision in a proceeding pursuant to 8 Del. C. § 220, the Court of Chancery held that a corporation cannot condition a stockholder’s access to its nonpublic financial statements on the stockholder’s agreement not to trade in the company’s stock.
Ravenswood Investment Company owns 10,000 shares of Winmill & Co. stock. Winmill is not a reporting company under the federal securities laws. It last released financial information in February 2010, when it announced results for the nine months ending September 30, 2009. Its stock trades on the over the counter market.
In September 2011, Ravenswood demanded to inspect Winmill’s books and records, including, among other things, its quarterly and annual financial statements for the previous two years and all subsequent periods until Winmill complied with the inspection demand. Winmill provided Ravenswood access to most of the requested books and records, but denied Ravenswood access to its financial statements unless Ravenswood promised, as part of a confidentiality agreement, not to trade in Winmill stock until the sooner of (a) three business days after the financial information becomes public or (b) one year from the date Ravenswood received the documents. Winmill’s proposal also provided for an exception to the trading restriction for trades with a “sophisticated person” who had received the nonpublic documents.
In late 2011, Ravenswood brought an action in the Court of Chancery seeking, among other things, an order allowing it access to Winmill’s financial statements without agreeing to a trading restriction. Ravenswood’s stated purpose for the inspection was to value its Winmill stock. Winmill’s position was that the trading restriction was necessary for Winmill to avoid potential “tipper” liability under federal securities laws.
Describing the issue as “an apparently novel legal question,” the Court of Chancery held that Delaware law does not permit Winmill to condition Ravenswood’s right to inspect on agreeing to a trading restriction. The Court noted the “fundamental stockholder right” to access information necessary to value stock, and highlighted that Winmill had not identified any Delaware authority endorsing the use of a trading restriction to protect the corporation from “tipper” liability. The Court dismissed as “unsupported speculation” Winmill’s concern that Ravenswood would unlawfully trade based on non-public information. From a pragmatic perspective, the Court noted that because Winmill’s stock was thinly traded, inspection of the financial statements may be the only practical means for Ravenswood to value its stock. The Court further observed that a potential yearlong trading restriction could defeat the purpose of valuing stock, which is to permit a stockholder to make informed decisions about investment strategy.
The full opinion is available here