If the employee is a stockholder, private companies, including secretive tech startups and other private emerging growth companies, must provide some company information, as confirmed by old law and new case.
Some ink is being spilled regarding the Biederman v. Domo case about a former employee and current stockholder suing Domo for financial information. Some of the ink tells the story, but some get it wrong. Let’s take a look.
I’m using news reports since I could not find an opinion or ruling, so accuracy may vary as we will see.
Domo usually keeps its financial information secret, like most companies. Domo also pays its employees in stock and options, like many tech and startup companies. Domo was richly valued in VC rounds, like many tech and startup companies. Domo’s value may have declined, like many tech and startup companies that were richly valued in VC rounds.
Biederman wanted information about Domo’s financial condition, Domo wanted a confidentiality agreement. Biederman refused. According to the Information, this
“highlighted an obscure Delaware law that gives investors the right to financial information of private tech firms in which they hold stock.”
The San Francisco Business Times (the “SFBT“) misreports the Information by stating that
“The Information reports that a Delaware law applies to any privately held company that has issued more than $5 million in stock awards in a year and is incorporated in the state. The rule allows employees of any U.S. private company a right to detailed financial information — even if they work for the famously opaque and sometimes secretive tech sector.”
Let’s unpack this a bit.
First, Section 220 of the Delaware General Corporation Law is not obscure. It is commonly invoked by stockholders who demand information. The universe of documents available to the stockholder is limited and related to the stockholder’s purpose for requesting the information.
Second, with respect to the SFBT, Delaware law cannot apply “to any privately held company,” only those subject to Delaware’s jurisdiction. The $5 million figure refers to SEC Rule 701, which exempts certain compensation benefit plans from SEC registration requirements and has nothing to do with Delaware law. Basically, certain disclosure requirements are triggered if the value of equity awards in a 12-month period exceeds $5 million.
None of this is new. There are those, particularly in the tech world, who don’t understand that old rules apply to them. You can’t force a stockholder to sign an agreement as a condition to exercising statutory rights. I suppose you can try, but a court may disagree. In some states, a company may be subject to penalties for refusing access to books and records.
Generally speaking, private companies do not have to make disclosures to stockholders (employee or otherwise). However, there are circumstances where statutes and regs require opening up, such as:
- pursuant to a proper books and records inspection request (most states have statutes requiring this, and the request has to be in proper form);
- while there are usually no specific disclosure requirements for stockholder meetings, fiduciary considerations apply when asking for stockholder vote, such as M&A transactions; and
- state and federal antifraud and registration/exemption rules apply when securities are involved.