Zalmon Uvaydov v. Robert Fenwick-Smith ( 2023 )

COURT OF CHANCERY
OF THE
STATE OF DELAWARE
LORI W. WILL LEONARD L. WILLIAMS JUSTICE CENTER
VICE CHANCELLOR 500 N. KING STREET, SUITE 11400
WILMINGTON, DELAWARE 19801-3734
Date Submitted: June 30, 2023
Date Decided: July 18, 2023
William M. Alleman, Jr., Esquire Catherine A. Gaul, Esquire
Sean A. Meluney, Esquire Randall J. Teti, Esquire
Matthew D. Beebe, Esquire Ashby & Geddes, P.A.
Meluney Alleman & Spence, LLC 500 Delaware Avenue, 8th Floor
1143 Savannah Road, Suite 3-A Wilmington, Delaware 19801
Lewes, Delaware 19958
R. Bruce McNew, Esquire Ronald N. Brown, III, Esquire
Cooch and Taylor, P.A. Kelly L. Freund, Esquire
1000 North West Street, Suite 1500 DLA Piper LLP (US)
Wilmington, Delaware 19801 1201 North Market Street, Suite 2100
Wilmington, Delaware 19801
RE: Uvaydov v. Fenwick-Smith et al.,
C.A. No. 2023-0137-LWW
Dear Counsel:
I write regarding the Lightning Defendants’ Motion for Continued
Confidential Treatment (the “Motion”).1 The movants seek an order under Court
of Chancery Rule 5.1(b) to continue the confidential treatment of information
redacted from the public version of the complaint. Three non-party petitioners,
who are plaintiffs in related federal securities litigation, oppose the Motion.
1
Lightning Defs.’ Mot. for Continued Confidential Treatment (Dkt. 15) (“Mot.”). The
“Lightning Defendants” are listed in the Motion. See id. at 1.
C.A. No. 2023-0137-LWW
July 18, 2023
Page 2 of 11
After weighing the public right of access against the interests of nominal
defendant Lightning eMotors, Inc. (“Lightning”), I conclude that the Motion
should be granted with limited exceptions.
I. BACKGROUND
This is one of several pending matters concerning the de-SPAC business
combination of GigCapital3, Inc. and Lightning’s predecessor, Lightning Systems,
Inc. In the present matter, plaintiff Zalmon Uvaydov is pursuing derivative claims
for breach of fiduciary duty against the pre- and post-de-SPAC Board of Directors,
and for fraud and aiding and abetting breaches of fiduciary duty against Lightning
Systems’ directors. He contends that GigCapital3 overpaid for the target and that
Lightning’s Board “tout[ed] sales prospects that it knew were unachievable.”2
Uvaydov’s Verified Shareholder Derivative Complaint (the “Complaint”)
was filed on February 6, 2023, with a redacted public version filed three days
later.3 The Complaint includes material that Uvaydov obtained from Lightning
through a books and records demand pursuant to 8 Del. C. § 220.
More than a year before the Complaint was filed, David P. Sarro, Kevin L.
Tye, and Jess Q. Williams (together, the “Federal Plaintiffs” or the “Petitioners”)
filed a putative class action in the United States District Court for the District of
2
Verified S’holder Derivative Compl. (Dkt. 1) (“Compl.”) ¶ 2.
C.A. No. 2023-0137-LWW
July 18, 2023
Page 3 of 11
Colorado (the “Federal Action”) against Lightning and certain of the individual
defendants here.4 The claims in the Federal Action are brought under the
Securities Act of 1933 and the Securities Exchange Act of 1934. The Federal
Action is subject to a discovery stay under the Private Securities Litigation Reform
Act of 1995 (“PSLRA”).5
On March 28, 2023, the parties to this lawsuit, the Federal Action, and
another related case engaged in an unsuccessful mediation session.6 According to
the Lightning Defendants, the Federal Plaintiffs subsequently announced an
intention to amend their pleading and requested that Lightning provide them with
the same books and records given to Uvaydov. Lightning declined because it
believes that producing the documents to the Federal Plaintiffs would contravene
the PSLRA discovery stay.7
3
Public Version of Verified S’holder Derivative Compl. (Dkt. 2).
4
Shafer v. Lightning eMotors, Inc., et al., No. 1:21-cv-02774-RMR-KLM (D. Colo.).
5
In addition, a putative class action was filed in this court on August 4, 2021. Delman v.
GigAcquisitions3, LLC, C.A. No. 2021-0679-LWW (Del. Ch.). Another derivative
complaint was filed in the United States District Court for the District of Colorado in
February 2023. Lanham v. Fenwick-Smith, et al., No. 1:23-cv-00507-NYW-NRN
(D. Colo.).
6
The Federal Plaintiffs received a copy of the unredacted Complaint during mediation.
See Suppl. Decl. of Boris Feldman (Dkt. 22) ¶ 2.
7
See Mot. at 5.
C.A. No. 2023-0137-LWW
July 18, 2023
Page 4 of 11
On June 8, the Petitioners filed a Notice of Challenge to Confidential
Treatment in this court.8 On June 15, the Lightning Defendants filed the Motion.
On June 22, the Petitioners filed an opposition to the Motion.9 On June 23, the
Lightning Defendants moved for leave to file two declarations in reply, which I
granted.10 On June 26, the Lightning Defendants filed two supplemental
declarations in further support of the Motion.11 On June 28, the Petitioners moved
for leave to file a sur-reply, which I granted as unopposed.12 After the Petitioners
filed their sur-reply on June 30,13 I took the Motion under advisement.
II. ANALYSIS
Court of Chancery Rule 5.1 “was created to accommodate a minor exception
to a truism, that in a free and democratic society courts must conduct their business
in the open, subject always to scrutiny by the public that these courts serve.”14 The
party seeking to maintain confidential treatment “bears the burden of establishing
8
Dkt. 14.
9
Opp’n to Defs.’ Mot. for Continued Confidential Treatment (Dkt. 17) (“Opp’n”).
10
Dkts. 18, 19.
11
Dkts. 21-22.
12
Dkt. 24.
13
Dkt. 27.
14
GKC Strategic Value Master Fund, LP v. Baker Hughes Inc., 2019 WL 2592574, at *2
(Del. Ch. June 25, 2019).
C.A. No. 2023-0137-LWW
July 18, 2023
Page 5 of 11
good cause” for continued confidentiality.15 Good cause may exist where “the
public interest in access to Court proceedings is outweighed by the harm that
public disclosure of sensitive, non-public information would cause.”16 When
confidential treatment is challenged, “the court balances the public and private
interests, ‘with a tie going to disclosure.’”17
Rule 5.1(f) permits “[a]ny person” to challenge the continued confidential
treatment of filings in this court.18 A challenger’s purpose does not affect a party’s
enduring “duty to designate confidential information under Rule 5.1 [and] ensure
that the redacted public document reflects only [the party’s] confidentiality
interests.”19 Still, “the court is [not] blind to the challenger’s identity or
motivations in conducting a Rule 5.1 analysis. It is a factor that the court can
appropriately weigh in its balancing of the public and private interests.”20
15
Ct. Ch. R. 5.1(b)(3).
16
Ct. Ch. R. 5.1(b)(2).
17
In re Lordstown Motors Corp. S’holders Litig., 2022 WL 601120, at *1 (Del. Ch. Feb.
28, 2022) (quoting GKC Strategic, 2019 WL 2592574, at *2).
18
Ct. Ch. R. 5.1(f); see Cormier v. Burns, C.A. No. 2021-1049-MTZ, at 3 (Del. Ch. Jan.
24, 2022) (ORDER) (“[T]he mere fact that the movant is a plaintiff subject to a PSLRA
stay does not invalidate his Rule 5.1 request.”).
19
See GKC Strategic, 2019 WL 2592574, at *6 (explaining that a challenger’s
motivations are “immaterial” to a party’s obligations under Rule 5.1).
20
Lordstown, 2022 WL 601120, at *7.
C.A. No. 2023-0137-LWW
July 18, 2023
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Although I review the Motion with the public’s access right front of mind, I
do so with some skepticism. The Petitioners are challenging confidential treatment
to generate fodder for an amended complaint in the Federal Action. This is not a
public interest.21 It is creative litigation gamesmanship.22
Lightning, for its part, asserts that the redactions do not impair the public’s
understanding of the claims in this matter. The Complaint contains 31 partial
redactions out of 222 paragraphs. According to Lightning, continued confidential
treatment for these redactions is warranted to protect it from competitive harm that
could result from disclosing its sensitive proprietary or financial material.
The challenged redactions fall into three categories: forward-looking
projections, customer identities and orders, and Board recommendations and
analyses. I take each in turn.
21
Cf. Al Jazeera Am., LLC v. AT&T Servs., Inc., 2013 WL 5614284, at *5 (Del. Ch. Oct.
14, 2013) (observing that challenges “filed by notable news organizations and reporters
demonstrate the public’s interest in th[e] litigation”); see also In re Boeing Co. Deriv.
Litig., 2021 WL 392851, at *3 (Del. Ch. Feb. 1, 2021) (same); Sequoia Presidential
Yacht Grp. LLC. v. FE P’rs LLC, 2013 WL 3724946, at *3 (Del. Ch. July 15, 2013)
(same).
22
See GKC Strategic, 2019 WL 2592574, at *2 (noting that “gamesmanship” can be
taken into account in a Rule 5.1 analysis).
C.A. No. 2023-0137-LWW
July 18, 2023
Page 7 of 11
A. Forward-Looking Projections
The bulk of the redactions concern revenue and production projections,
forecast to 2025.23 The Petitioners argue that the information is “stale” because it
“consists of assessments of projection capabilities and customer orders for vehicles
already in the market” and “out-of-date financial projections.”24 But according to a
declaration filed by Lightning’s Chief Legal Officer and Corporate Secretary Steve
Mason, it is not that simple.25
Mason’s sworn declaration states that the “projections redacted in the
Complaint are not stale and their disclosure would cause the Company competitive
harm.”26 “[P]rojections dating from 2020 continue to be sensitive competitive
information” since Lightning’s “industry is characterized by long sale cycles” with
customer orders that take months or years to complete.27 Even though Lightning’s
vehicles are in the market, a competitor could use the redacted information to
23
See Compl. ¶¶ 99-100, 102-11, 113-14, 116, 120-21, 123, 128. Paragraphs 146 to 148
of the Complaint reflect discussions of these projections by the Board and Audit
Committee. See infra note 39 and accompanying text.
24
Opp’n at 6.
25
Suppl. Decl. of Steve Mason (Dkt. 21) (“Mason Decl.”).
26
Id. ¶ 4.
27
Id. ¶¶ 4-5.
C.A. No. 2023-0137-LWW
July 18, 2023
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“discern Lightning’s overall production projections for a given customer” or “how
much previously projected revenue and production remain outstanding.”28
Given this context, revealing the information could cause competitive injury
to Lightning. Conversely, the public interest is slight. Lightning did not
whitewash the Complaint. Redactions pertaining to projections are—with one
exception addressed below29—appropriately limited to “precise sales and revenue
goals” and Lightning’s “anticipated production timeline.”30 An interested reader
can readily discern the nature of this action and the purported harms at issue
without the disclosure of Lightning’s sensitive forward-looking projections.
B. Non-Public Customer Identities and Orders
The second category of information concerns non-public customer identities
and orders.31 The Petitioners argue that there is no basis to conclude Lightning’s
customer relationships would be impaired if revealed.32 But, as Mason explains,
disclosure of confidential customer identities could provide competitors with
opportunities to “undercut Lightning’s relationships” given the nature of the
28
Id. ¶ 5.
29
See infra Order ¶ 2.a (detailing redactions to remain in paragraph 121 of the
Complaint).
30
Lordstown, 2022 WL 601120, at *4.
31
Compl. ¶¶ 103-06, 111, 113-16, 118-20, 128, 158. The Complaint does not redact the
names of customers that have been publicly disclosed. E.g., id. ¶¶ 106-10.
C.A. No. 2023-0137-LWW
July 18, 2023
Page 9 of 11
nascent electric vehicle industry.33 The risk of such harm is uncertain, yet
meaningful if realized. It outweighs the minor public interest in knowing
Lightning’s customer identities.34
The Complaint also narrowly redacts information about non-public customer
orders (actual and projected) and price terms.35 Good cause exists to maintain the
confidentiality of this material since disclosure could provide an unfair advantage
to third parties in future dealings with Lightning.36 “[T]he potential economic
harm caused by disclosure” of a price term “outweighs the public interest in
accessing that information, largely because knowledge about price terms does not
impinge on the public’s understanding of the disputes before this Court.”37 That is
32
Opp’n at 7.
33
Mason Decl. ¶ 6.
34
See Lordstown, 2022 WL 601120, at *6 (explaining, in the context of an early-stage
electric vehicle company, that “good cause exist[ed] to maintain the confidential
treatment of customers’ identities that are not already in the public mix”).
35
See Compl. ¶¶ 103-11, 113, 120, 123, 128.
36
Mason Decl. ¶ 9.
37
Al Jazeera Am., 2013 WL 5614284, at *5; see also In re Oxbow Carbon LLC, 2016
WL 7323443, at *4 (Del. Ch. Dec. 15, 2016) (finding good cause to maintain
confidentiality of prices offered by bidders and their identities); Mitsubishi Power Sys.
Ams., Inc. v. Babcock & Brown Infrastructure Grp. U.S., LLC, 2013 WL 10215618, at *2
(Del. Ch. Mar. 15, 2013) (ORDER) (holding that pricing and profit-related information
qualified for continued confidential treatment under Rule 5.1).
C.A. No. 2023-0137-LWW
July 18, 2023
Page 10 of 11
also true for the specifics of customer orders, which are not needed for the public
to understand the claims in the Complaint.38
C. Board Recommendations and Analyses
The final category of information concerns Board-level analyses and
discussions.39 The public interest in this category is generally stronger than in the
other two. The Complaint alleges that the Board members breached their fiduciary
duties and defrauded Lightning by, for example, making public misstatements
about Lightning’s financial projections, order backlog, and production capabilities.
The Board’s knowledge of such topics is at the core of this matter.
By and large, though, the allegations about the Board’s analyses and
deliberations are disclosed in the public version of the Complaint.40 The redacted
material concerns strategic discussions about revenue and product projections, key
customer relationships, and organizational planning. Disclosure could allow
Lightning’s competitors to identify Lightning’s business development strategies
and impair Lightning’s market competitiveness.41 Narrow redactions of this
38
See Lordstown, 2022 WL 601120, at *6.
39
Compl. ¶¶ 121, 146-51, 157.
40
See Lordstown, 2022 WL 601120, at *4 (cautioning that “general descriptions of
board-level summaries” are ineligible for confidential treatment); Cormier, C.A. No.
2021-1049-MTZ, at 3 (same).
41
Mason Decl. ¶¶ 4-7.
C.A. No. 2023-0137-LWW
July 18, 2023
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specific information do not impede the public’s understanding of Uvaydov’s
contention that Lightning overstated its sales prospects.42
A handful of the redactions go farther and sweep in vague generalities
discussed by the Board. In my view, these redactions are unnecessary and do little
to protect Lightning’s legitimate interests in maintaining the confidentiality of its
sensitive business information. The redactions that should be lifted in a revised
public version of the Complaint are detailed in an Order below.
III. CONCLUSION
The Motion is granted in part and denied in part. Lightning has shown good
cause for continued confidential treatment for most of the challenged
information.43 Several redactions go too far and must be lifted. Lightning is
directed to prepare a revised version of the Complaint for public filing consistent
with the Order accompanying this decision.
Sincerely yours,
/s/ Lori W. Will
Lori W. Will
Vice Chancellor
42
See GKC Strategic Value Master Fund, LP v. Baker Hughes Inc., C.A. No. 2017-0769-
SG, at 22-23 (Del. Ch. Feb. 28, 2019) (TRANSCRIPT) (discussing the “pinpoint
confidentiality” designations that Rule 5.1 “goes toward”).
43
Having found good cause for continued confidential treatment, I decline to take up the
Lightning Defendants’ arguments that the Petitioners’ challenge violates the PSLRA,
intrudes on mediation confidentiality, or runs contrary to 8 Del. C. § 220.
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
ZALMON UVAYDOV, )
)
Plaintiff, )
)
v. ) C.A. No. 2023-0137-LWW
)
ROBERT FENWICK-SMITH, TIM )
REESER, ANDREW COORS, CRAIG )
HUTH, HEATH MORRISON, GLEN )
PERLMAN, TRENT YANG, AVI KATZ, )
RALUCA DINU, NEIL MIOTTO, JOHN )
MIKULSKY, ANDREA BETTI- )
BERUTTO, PETER WANG, BRUCE )
COVENTRY, THADDEUS SENKO, and )
DIANA TREMBLAY, )
)
Defendants, )
)
and )
)
LIGHTNING EMOTORS, INC., )
)
Nominal Defendants. )
)
ORDER
WHEREAS, on February 6, 2023, plaintiff Zalmon Uvaydov filed a Verified
Shareholder Derivative Complaint (the “Complaint”) in this action;
WHEREAS, on June 8, 2023, petitioners David P. Sarro, Kevin L. Tye, and
Jess Q. Williams filed a notice challenging the confidential treatment of the
Complaint;
WHEREAS, on June 15, 2023, certain of the defendants filed a motion for
continued confidential treatment (the “Motion”);
WHEREAS, the Motion was fully briefed and submitted for decision as of
June 30, 2023; and
WHEREAS, on July 18, 2023, the court issued a letter opinion granting the
Motion in part and denying it in part;
IT IS HEREBY ORDERED this 18th day of July, 2023, that, for the reasons
set forth in the court’s July 18, 2023 letter opinion:
1. The Motion is granted insofar as the redacted information in
paragraphs 99-100, 102-11, 113-20, 123, 128, and 158 of the Complaint is entitled
to continued confidential treatment.
2. The Motion is denied insofar as some of the redactions in paragraphs
121, 146-51, and 157 of the Complaint are overbroad and include general
descriptions or would seem unlikely to cause competitive harm to Lightning if
disclosed. The following information only is entitled to continued confidential
treatment and may remain redacted:
a. Paragraph 121: Text in the fourth line after “[that]” through and
including the remainder of the paragraph.
b. Paragraph 146: The dollar figure in the second line.
2
c. Paragraph 147: Text in the second line after “by” through but
not including “but” in the third line; text in the fourth line after “from” through but
not including “purportedly”; and quoted text in the fifth line.
d. Paragraph 149: Quoted text in the third line and the image on
page 38.
e. Paragraph 150: Text in the fourth line after “revised” through
the end of that sentence ending on the fourth line.
f. Paragraph 157: The images on pages 40 and 41.
3. For the avoidance of doubt, except as set forth in paragraphs 2(a) to
2(f) above, the redactions in paragraphs 121, 146-151, and 157 must be lifted.
4. A revised public version of the Complaint consistent with this Order
shall be filed within five business days.
/s/ Lori W. Will
Lori W. Will
Vice Chancellor
3