Page 33 - Delaware Lawyer - Fall 2022

Stockholders of Delaware corporations can make a demand on the company to inspect books and records pursuant to Section 220 of the Delaware General Corporation Law.
option holders. Investment decisions are just that: a decision. But for em- ployees, they may be much more. Such a decision may be part of a much larger set of decisions; to borrow the capital necessary to exercise the options, to stay with the firm or even to join it in the first instance, and whether or not to in- vest more or join a liquidity event.
Information has always been a pow- erful tool for investors on any level. Balancing that need and protecting that right is critical for the health of both public and private markets. A better outcome for all parties is not something to turn away from and the opportunity is here. Delaware is equipped to remain at the forefront of protecting stock- holder rights. The question is whether it will take advantage of the opportunity or let it slip away.
NOTES
1. See Anat Alon-Beck, Unicorn Stock Op- tions — Golden Goose or Trojan Horse, 2019 COLUM. BUS. L. REV. 107 (2019) (discuss- ing the example of employees at Good Tech- nology); see also Katie Benner, When a Uni- corn Start-Up Stumbles, Its Employees Get Hurt, N.Y. TIMES (Dec. 23, 2015) (available a t h t t p s : // w w w . n y t i m e s . c o m / 2 0 1 5 / 1 2 / 2 7/ technology/when-a-unicorn-start-up-stum- bles-its-employees-get-hurt.html).
2. See J. BLASI, D. KRUSE & A. BERN- STEIN, IN THE COMPANY OF OWNERS: THE TRUTH ABOUT STOCK OPTIONS AND WHY EVERY EMPLOYEE SHOULD HAVE THEM (2003).
3. Supra note 1.
4. A unicorn is a privately held startup com- pany with a valuation in excess of $1 billion. 5. Allison Herren Lee, Commissioner, U.S. Sec. & Exch. Comm’n, Going Dark: The Growth of Private Markets and the Impact on Investors and the Economy (Oct. 12, 2021), https://www.sec.gov/news/speech/lee-sec- speaks-2021-10-12.
6. See Anat Alon-Beck, Alternative Ven- ture Capital: The New Unicorn Investors, 87 TENN. L. REV. 983 (2020).
7. See supra note 2 at 86, n.3.
8. John Livingstone and Anat-Alon Beck,
Mythical Unicorns and How to Find Them, 2022 COLUM. BUS. L. REV. (Forthcom- ing).
9. U.S. SEC. & EXCH. COMM'N., SPE- CIAL STUDY OF SECURITIES MAR- KETS, H.R. Doc. No. 88-95, at 34 (1964).
10. Id.
11. Id.
12. Supra note 5.
not even cross the regulatory thresholds and could voluntarily delist from public markets should they chose to do so.12
When viewed separately, the dimin- ishment of information being granted under federal law and the attempts to contract out under state law are each in- dividually concerning. But when taken together, it is hard to imagine that the efforts currently being undertaken by many of the large, sophisticated com- panies in the tech industry are anything less than a deliberate attempt to ob- scure information from a certain class of shareholders. Large, outside investors like venture capital funds have the abil- ity and necessary leverage to demand information and extract certain rights as part of their investments. Unfortunate- ly, that may compound the harm done to smaller, ordinary common stock in- vestors like employees.
As the economy flirts with a slow- down, the venture capital world is brac- ing for a wave of down round financ- ing. It is largely expected that a number of these rounds will include protective provisions being inserted by new or repeat investors. Anti-dilutive rachets, preferential liquidation rights, and cer- tain dividend provisions are all likely to become more frequent. The effect of these contractual provisions will be nearly indiscernible on Rule 701 disclo- sures and may only be capable of being discovered via a Section 220 demand
for purposes of valuation. The effect on common shareholders will be muddied and hidden from view.
Delaware, therefore, has a chance to make a significant impact here. There is a gap in Delaware law on whether a con- tract between the company and its em- ployees, which operates independently and outside the charter or bylaws, can modify or eliminate the mandatory in- spection rights expressly set forth in the Delaware General Corporation Law. As we see information diminishing from one end of the proverbial candle, it is impera- tive for this diminishment to be taken into account from an equitable perspec- tive when considering the enforceability of these provisions. As federal securities laws began to offer less protection to in- vestors, we have already seen the increas- ing reliance on Section 220 to cover the information gap. As it is debated in Dela- ware courts and in the legislature, it must be viewed not just within the Delaware law context, but in how it interacts with securities laws as well.
The State is not without the abil- ity to strengthen such protections. The Court of Chancery can find that Section 220 is a non-waivable provision, allow- ing for the equitable treatment of share- holders across all classes when it comes to demanding information. The Dela- ware General Assembly can also consid- er crafting a more limited provision in parallel to the spirit of Section 220 for
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