Stockholder right to information vs NDA

From the looks of it, the intracorporate dispute among the members of the third generation of the Lopez clan may continue to simmer in spite of the withdrawal by the majority stockholders of their earlier resolution removing Federico “Piki” Lopez as president and CEO of First Gen Corp.

A stockholder of the company asked its board of directors to furnish him copies of all board and committee meetings at which the transaction with Prime Infrastructure Capital Inc. was deliberated upon or approved.

He wants to know, among others, whether contentious provisions of the covering contract were adequately disclosed and whether the board performed its duties of due diligence required under the Revised Corporation Code.

Through those documents, if he thinks the board was remiss in its fiduciary obligations, he can file a derivative suit, which is an action that allows a stockholder to sue on behalf of the corporation to address a wrong committed against it when the board fails or refuses to take that action.

The law grants to stockholders, regardless of the number of shares they own, the right to inspect corporate documents, subject to the condition that they shall comply with the rules on confidentiality of intellectual property and data privacy.

But the board may refuse to give the records asked for if it thinks the stockholder is not acting in good faith or the request is not for a legitimate purpose or the latter represents the interests of a competitor or has in the past improperly used any information obtained through that right.

According to reports, some of the documents involved in the transactions with Prime Infra are covered by a nondisclosure agreement (NDA), as it is commonly called in business and legal circles.

In essence, an NDA prohibits parties who are engaged in commercial discussions, or after any contracts have been signed, from sharing with third parties confidential information, such as proprietary information, trade secrets or sensitive data, that were earlier disclosed or are mentioned in the contracts without the prior approval of the counterparty.

Any violation of the confidentiality agreement could give rise to financial sanctions on the erring party or, if the damage caused by that breach is substantial, the cancellation of the contracts.

The question is posed: Is the NDA a justifiable cause to bar the exercise of a stockholder’s right to inspect contracts that bear confidentiality provisions?

It is a well-settled rule that the NDA is inapplicable if the disclosure of confidential information is required by law, an order of a court of competent jurisdiction, or to comply with a regulatory requirement. This carve-out is a template in NDAs in the country.

As these exceptions are presumed to be in the public interest, they override any considerations of privacy that the NDA aims to preserve and protect.

See Also

BIZ BUZZ: A clearer runway for GCash?

If, in spite of the presence of an NDA in the requested documents, the board agrees to release them, fine. A written undertaking by the requesting stockholder that he or she will maintain their confidentiality would serve the best interests of both parties.

But what if the board invokes the NDA and refuses to make available the affected documents? If the reason behind the NDA does not jibe with or meet the criteria of the instances earlier cited that justify the restriction of a stockholder’s right to inspection, the aggrieved stockholder would have to seek relief from the Securities and Exchange Commission.

In case a conflict between that right and the need to honor an NDA arises, it is reasonable to expect that the motive or objective of the board in agreeing to the NDA would come under scrutiny.

Was the NDA a nonnegotiable item in the contract that the board was compelled to agree to? Is the contract critically important to the company to justify agreeing to an NDA that may curtail a stockholder’s right of inspection? Is the board entitled to the presumption of good faith when it took that action?

As the NDA has evolved as a standard practice in today’s commercial activities, it is expected to spawn more issues about its application.

For comments, please send your email to raul.palabrica@inquirer.net.