Unicorns, Delaware, and Private Company Financial Disclosure
When Should Companies Disclose Valuation Information to Their Owners?
What if every private company had to disclose its financial statements, stockholder list, and other information relevant to valuation to any of its shareholders upon their written request?
The Wall Street Journal reported (subscription required) yesterday that under an “obscure law,” shareholders of Delaware corporations can do just that, according to Section 220 of the Delaware Code, titled “Inspection of Books and Records.” The Wall Street Journal article discusses a number of startups with billion dollar plus valuations (called “unicorns”) who are having to open their books to small shareholders as result of their requests under Section 220.
Implications of Delaware Section 220
At issue for the smaller shareholders of the unicorns is transparency over valuation. Valuations are in question for many of these private tech companies. Many have had round after round of cash investments from venture investors, raising valuations to stratospheric heights. I wrote about the valuation of Uber recently, where, based on a financing round in October 2015, Uber’s implied equity capitalization of $51 billion exceeded that of Federal Express.
However, the market for continuing investments is tightening, with investors redirecting their managements to focus on profitability instead of just growth. The IPO market for tech IPOs is virtually shut down now, so there is continuing pressure on unicorn valuations. The Wall Street Journal noted that many mutual firms have marked down their stakes in some startups. Smaller shareholders are trying to find out what is going on.
The companies desire to keep their information private from all but major stockholders. The explanation:
Companies say keeping their financial information private, even from some stockholders, prevents it from falling into rival hands. The lack of public scrutiny also gives them freedom to invest for the long-term.
However, that game may be up for many of the tech privates domiciled in Delaware. Delaware Section 220 says, in part:
(b) Any stockholder, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose, and to make copies and extracts from:
(1) The corporation’s stock ledger, a list of its stockholders, and its other books and records; and
(2) A subsidiary’s books and records… (emphasis added)