Opinion
Opinion By: Andy Beshear,Attorney General;James M. Herrick,Assistant Attorney General
Open Records Decision
The question presented in this appeal is whether the Cabinet for Economic Development violated the Open Records Act in denying Courier-Journal reporter Tom Loftus' June 30, 2017, request for records identifying shareholders and investors in Braidy Industries, Inc. For the reasons stated below, we find that the Cabinet violated the Act.
Braidy Industries, Inc. ("Braidy"), is a Delaware corporation, incorporated on August 26, 2016. The company has been described as a "start-up" founded by Craig T. Bouchard, which plans to engage in the business of aluminum alloy research and manufacturing.
During the 2017 legislative session, the General Assembly passed HB 482, as altered by a Senate Committee Substitute. HB 482 reopened the Executive Branch budget to allow for either (a) $ 15 million in bond funding for the Kentucky Economic Development Finance Authority ("KEDFA") Loan Pool, or (b) $ 15 million dollars from the General Fund Surplus Account or Budget Reserve Trust Fund. HB 482 required the funds to be used "for the sole purpose of facilitating a private sector investment of no less than $ 1,000,000,000 in one or more locations in the Commonwealth." The bill also required the funds to be used on "programs administered by" KEDFA.
On April 26, 2017, Governor Matt Bevin and Mr. Bouchard announced that Braidy would build a $ 1.3 billion aluminum plant in Greenup County. The official press release from the Cabinet for Economic Development stated that the decision appeared to have been made after KEDFA held a special meeting on the same day to approve $ 10 million in tax incentives through the Kentucky Business Investment Program.
A day after the announcement, at its regular meeting on April 27, 2017, KEDFA authorized the transfer of the $ 15 million in bond funds from the High-Tech Investment Pool to the Kentucky Economic Development Partnership ("KEDP"). KEDP serves as the governing body of the Cabinet for Economic Development pursuant to KRS 154.10-030(1) 1 and approves "economic development programs and projects" pursuant to KRS 154.10-030(4).
On April 27, 2017, KEDP authorized a $ 15 million capital contribution into Commonwealth Seed Capital, LLC ("CSC"). The contribution came with the requirement that it be used to facilitate an investment in Kentucky of at least $ 1 billion. CSC approved the investment of the $ 15 million to purchase direct equity in Braidy, which resulted in the issue of stock in Braidy to CSC. 2 This investment resulted in 20% ownership of Braidy. While the parties submit various arguments about these transfers, it is clear that $ 15 million of public funds was used to purchase 20% ownership in the stock of Braidy.
In his request to the Cabinet dated June 30, 2017, on behalf of the Courier-Journal , Mr. Loftus stated:
Specifically, I am requesting copies of any and all documents that list the stockholders or investors in Braidy Industries, Inc., a corporation organized in Kentucky on June 1, 2017 and with its principal office [in Ashland, Kentucky].
This request seeks all documents the cabinet has received that show the names of stockholders/ investor in Braidy Industries, Inc., including any original list plus any subsequent lists that may reflect additions or changes in the names of those investors.
On July 6, 2017, the Cabinet produced two KEDFA board reports, which identified Craig T. Bouchard and CSC as possessing a "20% or more" ownership in Braidy. The Cabinet further responded, in pertinent part, as follows:
The attached board reports are made available for your inspection as the contents of those reports were presented during publicly held meetings of [KEDFA]. The identity of other stockholders or investors in Braidy Industries, Inc. are not subject to inspection under the Open Records Act for the reasons discussed below.
KRS 61.878(1)(a) exempts from inspection records containing "information of a personal nature where the public disclosure [would] constitute a clearly unwarranted invasion of privacy [ sic ]." The privacy right of a private stockholder or investor not to be publically identified as having an ownership interest in a private enterprise is substantial and disclosure of the stockholder or investor would constitute a clearly unwarranted invasion of privacy.
KRS 61.878(1)(i) exempts from disclosure records including "[p]reliminary drafts, notes, correspondence with private individuals, other than correspondence which is intended to give notice of final action of a public agency" and (1)(j) exempts inspection of "[p]reliminary recommendations, and preliminary memoranda in which opinions are expressed or policies formulated or recommended[.]" The names of prospective stockholders or investors in Braidy Industries, Inc. were made known during the course of the Partnerships' [ sic ] evaluation, analysis and determination whether to commit the above referenced public funds to facilitate economic development. Because the identity of the prospective stockholders or investors are contained in preliminary materials relevant to the Partnerships' determination as to a particular course of action, the materials containing the names of the prospective stockholders or investors are exempt from disclosure. See also: Baker v. Jones, 199 S.W.3d 749 (Ky. App. 2006).
KRS 61.878(1)(c)1. exempts from inspection records confidentially disclosed to the cabinet, which are considered confidential or proprietary if disclosure would permit an unfair commercial advantage to the competitors of the parties subjected to the disclosure. As private investors in a private business enterprise, the identities of the stockholders and investors in Braidy Industries, Inc. are confidential and disclosure of their names would permit an unfair advantage to their competitors. The manner in which competitors might gain an unfair advantage are too varied and multiplicitous to describe. However, it might include for example, allowing the competitor to acquire an understanding to some degree of the potential financial and resource commitment of the prospective stockholders or investors which might expose their vulnerabilities elsewhere; or, it may allow the competitor to develop a perspective of the stockholders ['] or investors ['] potential future investments or business strategies bearing on related endeavors.
Braidy Industries, Inc.'s application for economic development incentives, including supporting documentation, correspondence, records or writings, is not included. These records are exempt from inspection pursuant to KRS 61.878(1)(c)2.b., which expressly exempts applications for incentive programs and tax credits contained in KRS Chapter 154. See also Hoy v. Indus. Revitalization Auth., 907 S.W.2d 766, 768 (Ky. 1994).
The Courier-Journal initiated this appeal on July 19, 2017, and the Cabinet responded on July 31, 2017.
In analyzing the arguments made by the parties, we take into account the public agency's burden of proof in sustaining its action under KRS 61.880(2)(c). We are further mindful of the admonition in KRS 61.871 that "free and open examination of public records is in the public interest and the exceptions provided for by KRS 61.878 . . . shall be strictly construed, even though such examination may cause inconvenience or embarrassment to public officials or others." Ultimately, as set forth below, we rule that that the Commonwealth cannot have "secret partners" in this situation.
Personal privacy under KRS 61.878(1)(a)
KRS 61.878(1)(a) authorizes public agencies to withhold:
Public records containing information of a personal nature where the public disclosure thereof would constitute a clearly unwarranted invasion of personal privacy.
In 1992, the Kentucky Supreme Court established a standard by which we judge the propriety of a public agency's reliance on KRS 61.878(1)(a) as a basis for denying access to public records. At pages 327 and 328 of Kentucky Board of Examiners of Psychologists v. Courier-Journal and Louisville Times Co., 826 S.W.2d 324 (Ky. 1992), the Court articulated the following standard:
[G]iven the privacy interest on the one hand and, on the other, the general rule of inspection and its underlying policy of openness for the public good, there is but one available mode of decision, and that is by comparative weighing of the antagonistic interests. Necessarily, the circumstances of a particular case will affect the balance. The statute contemplates a case specific approach by providing for de novo judicial review of agency actions, and by requiring that the agency sustain its action by proof. Moreover, the question of whether an invasion of privacy is "clearly unwarranted" is intrinsically situational, and can only be determined within a specific context.
The Court admonished that "the policy of disclosure is purposed to subserve the public interest, not to satisfy the public's curiosity . . . ." Id.
In a subsequent analysis of the privacy exemption, the Court of Appeals refined this standard. Zink v. Com., Dept. of Workers' Claims, 902 S.W.2d 825 (Ky. App. 1994). At page 828 of that opinion, the court discussed its "mode of decision":
[O]ur analysis begins with a determination of whether the subject information is of a 'personal nature.' If we find that it is, we must then determine whether public disclosure 'would constitute a clearly unwarranted invasion of personal privacy. ' This latter determination entails a 'comparative weighing of antagonistic interests' in which the privacy interest in nondisclosure is balanced against the general rule of inspection and its underlying policy of openness for the public good. [ Board of Examiners ] at 327. As the Supreme Court noted, the circumstances of a given case will affect the balance. Id. at 328.
The public interest to be considered is the purpose of the Open Records Act in general, which "is meant to open the state's public agencies to meaningful public oversight, to enable Kentuckians to know 'what their government is up to.' It is not meant to turn the state's agencies into a clearing house of personal information about private citizens readily available to anyone upon request." Kentucky New Era, Inc. v. City of Hopkinsville, 415 S.W.3d 76, 89 (Ky. 2013). See also Zink, supra, 902 S.W.2d at 829 ("the purpose of disclosure . . . is not fostered however by disclosure of information about private citizens . . . that reveals little or nothing about an agency's own conduct").
The Courier-Journal argues that because the Commonwealth has invested state money in Braidy for economic development purposes, "[t]he public is entitled to examine whether any of the other shareholders has other business dealings or personal relationships with the public officials responsible for investing" the money, to ensure "that the expenditure of funds was not the result of improper influence peddling, graft, or the like." Thus, it argues that the identities of individual shareholders of Braidy must be disclosed just as the names of anonymous donors of "substantial gifts" to a state university foundation raised a suspicion of improper influence or benefits in Cape Publications, Inc. v. University of Louisville Foundation, Inc., 260 S.W.3d 818, 823 (Ky. 2008).
The Cabinet responds that the Open Records Act is "premised upon the public's right to expect its agencies properly to execute their statutory functions," Lawson v. Office of Att'y General, 415 S.W.3d 59, 70 (Ky. 2013), and that "disclosing the names of the other Braidy Industries' shareholders offers nothing to show whether the Cabinet is executing its statutory obligations." Furthermore, the Cabinet argues that the personal assets and investment behavior of private individuals are "matters of personal finance [which] are intensely private and closely guarded," Cape Publications, supra, 260 S.W.3d at 822, and thus analogous to personal income, the "intimate nature" of which was recognized in Zink, supra, 902 S.W.2d at 829.
The question, therefore, is whether individual stockholders in Braidy have a substantial enough privacy interest in the singular fact they have invested in the company to outweigh the public interest in disclosure of that information. We conclude that they do not.
The identities of the shareholders in Braidy are unquestionably a matter of public interest. As we have previously stated, the Open Records Act is premised on the idea that "[g]overnment action should be open and subject to review in order to foster confidence and trust as well as to ensure that public funds are properly spent." OAG 96-43. Moreover, we have recognized that "wherever public funds go, the public interest follows." OAG 76-648.
Here, the Cabinet, through CSC, made an extraordinary investment of public funds in Braidy. In doing so, the Commonwealth has conferred a direct benefit on the Braidy shareholders in the form of a capital injection into Braidy. Moreover, the Commonwealth is now in business with those shareholders. This creates a heightened public interest in disclosure.
As the Supreme Court has held, "[t]he public's 'right to know' under the Open Records Act is premised upon the public's right to expect its agencies properly to execute their statutory functions." Zink, 902 S.W.2d at 828 (quoting Dep't of Justice v. Reporters Comm. for Freedom of Press, 489 U.S. 749, 774-75 (1989)). We believe that revealing the identities of the shareholders of Braidy serves the purposes of the Open Records Act because it will allow the public to evaluate the Cabinet's decision to invest substantial resources in that company. See also Courier--Journal & Louisville Times Co. v. Peers, 747 S.W.2d 125, 130 (Ky. 1988) (disclosure of requested documents was required primarily because the information concerned "the expenditure of public funds" ).
Moreover, the Braidy shareholders' privacy interests do not outweigh the public interest in disclosure. The Courier-Journal seeks only the names of the shareholders, and not additional financial information, such as the number or value of their holdings. The initial question in this inquiry is "whether the subject information is of a 'personal nature.'" Zink, 902 S.W.2d at 828. As we have repeatedly held, "a person's name is personal but it is the least private thing about him." OAG 82-234. Here, the only information that will be publicly revealed is the fact that the shareholders own equity in Braidy. Cf. Cape Publications, 260 S.W.3d at 822 (requiring disclosure of donors and the amounts of their gifts, and observing that while such information is private, it is "not as intimate as one's income").
We are mindful that the identities of shareholders in private companies are not generally public information. But the identity of a shareholder is not absolutely secret, either. Under both Kentucky and Delaware law, a shareholder may learn the identity of the other shareholders in a company. See KRS 271B.16-020(2)(c); Delaware General Corporation Law Section 220(b). Accordingly, Braidy's shareholders cannot have reasonably expected that their identities would remain secret from other shareholders . While the immediate owner of the equity in Braidy is CSC, and not the Cabinet, the citizens of the Commonwealth are, ultimately, the investors in Braidy, and the Braidy shareholders could not reasonably expect that their identities would be kept secret from their co-investors. Thus, any invasion of privacy that would result from disclosing their names is minimal. We therefore find that the balance weighs in favor of disclosure under KRS 61.878(1)(a).
Confidential disclosures under KRS 61.878(1)(c)1 .
We next consider the application of KRS 61.878(1)(c)1. That subsection exempts from disclosure:
records confidentially disclosed to an agency or required by an agency to be disclosed to it, generally recognized as confidential or proprietary, which if openly disclosed would permit an unfair commercial advantage to competitors of the entity that disclosed the records.
We have construed this as a three-prong test, such that in order to qualify for exclusion under KRS 61.878(1)(c)1., a public record must be:
(1) confidentially disclosed to an agency or required by an agency to be disclosed to it;
(2) generally recognized as confidential or proprietary; and
(3) of such a character that open disclosure would permit an unfair commercial advantage to competitors of the disclosing entity.
( See 05-ORD-155 and authorities cited therein.)
The Cabinet asserts, and the Courier-Journal does not appear to dispute, that the "names of the other Braidy Industries' shareholders were disclosed confidentially to the Cabinet" as part of KEDP's review prior to authorizing the transfer of funds as a capital contribution to CSC. We therefore assume for present purposes that the first prong of the test has been met, and proceed to examine whether the names of shareholders are "generally recognized as confidential or proprietary. "
We note once again that KRS 271B.16-020(2)(c) permits shareholders in a corporation to access a list of the other shareholders for certain purposes. Furthermore, there is nothing in the record to indicate a general custom or usage regarding such information as confidential; nor has any argument been made specifically as to why the names of shareholders should be regarded as "proprietary" information of Braidy. Accordingly, we do not find this information confidential or proprietary.
We turn, lastly, to the question of whether disclosure of the listing of Braidy's stockholders "would permit an unfair commercial advantage" to Braidy's competitors. We conclude that it would not.
The Cabinet has already asserted that disclosure would permit industry competitors an understanding of "the potential financial and resource commitment of the prospective stockholders or investors which might expose their vulnerabilities elsewhere" or "allow the competitor to develop a perspective of the stockholders ['] or investors ['] potential future investments or business strategies bearing on related endeavors." On appeal, the Cabinet further argues:
As discussed, names of the other Braidy shareholders were disclosed confidentially to the Cabinet. Releasing the names of these shareholders would give their competitors an unfair commercial advantage, as it would allow their competitors access to confidential nonpublic information about the company the competitors could use to profile Braidy Industries or to obtain insight into its financial status and business resources.
. . . [I]t is routine for business organizations to set about in an effort to gain information about their competitors. . . . Confidential information about a company, ( i.e. , information about a company that is not publically available), that would permit its competitors any ability or enhanced ability to profile the company or to obtain insight into the company's financial status, access to management services, areas of expertise, business patterns, strategies, affiliates, etc., constitutes unfair commercial advantage.
Thus, the Cabinet maintains that public disclosure of Braidy's shareholder records would unfairly permit competitors access to significant private financial information.
We do not find that the Cabinet has met its burden of proof on this point, in light of the fact that we do not regard the names of corporate shareholders, in isolation, as confidential or proprietary information.
Our decisions have "recognized that records relating to private financial affairs can be exempted under the Kentucky Open Records Act. " 01-ORD-143 (citation form modified to current practice); see also 10-ORD-191. We do not, however, believe that the identities of the shareholders reveal anything of substance about the economic status of either Braidy or its shareholders. Specifically, the fact that an individual is an equity holder does not reveal how well-capitalized the company is, and it says nothing about how much money the investor has. This is not a case in which a requester seeks detailed personal financial information that could provide an advantage to competitors. See, e.g., Marina Mgmt. Serv., Inc. v. Com., Cabinet for Tourism, 906 S.W.2d 318, 319 (Ky. 1995) (permitting agency to withhold records that reflected "asset values, notes payable, rental amounts on houseboats, related party transactions, profit margins, net earnings, and capital income").
Furthermore, the relevant "competitive" interest in this case is not in the nature of trade secrets, investment strategies, economic status, or business structures, but rather the competition for funding that has already concluded, which resulted in the investment of $ 15 million of the Commonwealth's resources (along with the approval by KEDFA of $ 10 million in tax incentives for Braidy Industries). Since no unfair commercial disadvantage to Braidy or its investors has been shown, we find that the Cabinet has not met its burden of proof with respect to KRS 61.878(1)(c)1.
Confidential disclosures under 61.878(1)(c)2.b .
As to KRS 61.878(1)(c)2.b., also invoked by the Cabinet, that subsection applies to:
records confidentially disclosed to an agency or required by an agency to be disclosed to it, generally recognized as confidential or proprietary, which are compiled and maintained . . . [i]n conjunction with an application for or the administration of assessments, incentives, inducements, and tax credits as described in KRS Chapter 154.
Citing Hoy v. Kentucky Industrial Revitalization Authority, 907 S.W.2d 766, 768 (Ky. 1995), the Cabinet argues that certain e-mails containing shareholder names "involve Braidy Industries' application for economic incentives which are exempt from disclosure pursuant to KRS 61.878(1)(c)2.b."
The Hoy case recognized certain information as confidential or proprietary, but that information "included a financial history of the corporation, projected cost of the project, the specific amount and timing of capital investment, copies of financial statements and a detailed description of the company's productivity, efficiency and financial stability." 907 S.W.2d at 768. Here, only the names of the Braidy shareholders are at issue. As we have already found in regard to KRS 61.878(1)(c)1., there has not been an adequate showing that this specific information is "generally recognized as confidential or proprietary. "
KRS 61.878(4) provides: "If any public record contains material which is not excepted under this section, the public agency shall separate the excepted and make the nonexcepted material available for examination." Since only the list of shareholder names has been requested, any confidential and proprietary information that may appear in the records disputed under KRS 61.878(1)(c)2.b. can be redacted, so long as the shareholder names are disclosed.
Preliminary documents under KRS 61.878(1)(i) and (j)
Finally, we consider the arguments of the parties under KRS 61.878(1)(i) and (j). Those subsections permit the withholding of, respectively:
Preliminary drafts, notes, correspondence with private individuals, other than correspondence which is intended to give notice of final action of a public agency; [and]
Preliminary recommendations, and preliminary memoranda in which opinions are expressed or policies formulated or recommended.
The Courier-Journal argues that the requested lists of shareholder names "are not 'preliminary' in any way" because the Cabinet has already completed the investment of funds in Braidy Industries and "expressly admitted that its decision to do so was based upon its review of the identities of stockholders or investors in the company." The Cabinet responds:
It is important to note that the names of the shareholders not disclosed to Loftus concern those that did not become shareholders in Braidy Industries until May 4, 2017, the date when Braidy Industries and its shareholders entered into a stock purchase agreement. (A list of Braidy Industries' shareholders is an exhibit to the stock purchase agreement.) Before the Partnership authorized transfer of $ 15 million in funds to be used as a capital contribution to CSC on April 28, 2017, the Cabinet issued written communications and exchanged email correspondence with potential parties that would become investors or shareholders in Braidy Industries. Cabinet staff also exchanged email and possessed information relating to negotiations that would eventually culminate in those parties not disclosed to Loftus becoming shareholders on May 4, 2017.
(Emphasis added.) For this reason, the Cabinet argues that KEDP did not rely on "their status as shareholders" in deciding to transfer the funds to CSC, because the shareholders in dispute did not become shareholders until the stock purchase agreement was concluded.
This constitutes, in our view, a distinction without a difference. In University of Kentucky v. Courier-Journal & Louisville Times Co., 830 S.W.2d 373, 378 (Ky. 1992), the Kentucky Supreme Court made clear that "materials that were once preliminary in nature lose their exempt status once they are adopted by the agency as part of its action."
In 01-ORD-47, we summarized the manner in which "preliminary" records under KRS 61.878(1)(i) or (j) may retain or lose their exemption after final agency action is taken:
Until final administrative action is taken, or a decision is made to take no action , the requested records are protected by KRS 61.878(1)(i) and (j). If the records are adopted as part of that final action, they will forfeit their preliminary characterization. If not adopted, they will retain their preliminary character.
(Emphasis added.) It is not necessary that the record be explicitly adopted or incorporated by reference, so long as it constitutes the basis for the final agency action. "In our view, the courts purposefully employed the broader concept of 'adoption' rather than 'incorporation,' relative to preliminary investigative reports and records, to avoid a narrow, legalistic interpretation." 01-ORD-83 (citing City of Louisville, supra).
Whether the Cabinet relied upon the investors' identity as existing stockholders of Braidy, or as future stockholders of Braidy, does not alter the fact that the review of this information constituted part of the basis of the Cabinet's investment decision. Thus, we find that the names in question were adopted as part of the basis of final agency action and therefore no longer retain a preliminary character under KRS 61.878(1)(i) or (j). Accordingly, the requested names must be disclosed.
A party aggrieved by this decision may appeal it by initiating action in the appropriate circuit court pursuant to KRS 61.880(5) and KRS 61.882. Pursuant to KRS 61.880(3), the Attorney General must be notified of any action in circuit court, but should not be named as a party in that action or in any subsequent proceeding.
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