Analysis

The court framed the issue as follows: “Does management of a Delaware corporation have the authority to unilaterally preclude a director of the corporation from obtaining the corporation’s privileged information?”⁸ In answering this question, the court noted that, while “a director’s right to information is essentially unfettered in nature,” “a corporation cannot assert [the attorney-client] privilege to deny a director access to legal advice furnished to the board during the director’s tenure.”⁹  The court noted three exceptions to a director’s general right to information, including: (1) the existence of an ex ante agreement among the contracting parties; (2) that a board may appoint a special committee, which would be free to retain separate counsel, and communications with separate counsel would be protected as necessary for the special committee to conduct its ongoing work; or (3) the extent to which there is sufficient adversity between a director and the corporation “such that the director would no longer have a reasonable expectation that he was a client of the board’s counsel.”¹⁰

The court explained that, regardless of whether or not adversity existed, the dispute at issue turned on a novel question under Delaware law: “Does management … have the authority to unilaterally preclude a director of the corporation from obtaining the corporation’s privileged information?”¹¹ The court further explained that the adversity exception asserted by the Company’s management was inapplicable.¹²

First, the court held that the adversity exception was inapplicable because it only addresses information withheld by “a board or a committee,” and not a company’s officers.¹³ The court reasoned that the decision by the Company’s management to “unilaterally” withhold the privileged information from the Special Committee “cannot be squared with the natural order of Delaware corporate law” and violated the “cardinal precept … that ‘the business and affairs of a corporation ... shall be managed by or under the direction of a board of directors.’”¹⁴  The court further reasoned that “[i]t is because ‘directors are responsible for the proper management of the corporation’ that they should ‘be treated as a joint client when legal advice is rendered to the corporation through one of its directors or officers.’”¹⁵  The court concluded that the Company’s argument that it could “shield” the Company’s privileged information from the directors on the Special Committee “turns these bedrock principles of Delaware law on their head.”¹⁶

Next, the court rejected concerns raised by the Company’s management that sharing privileged communications would create a “disincentive” for management to communicate with counsel due to fear of subsequent disclosure.¹⁷  The court held that “[u]nder the oversight structure of Delaware law, these concerns must give way to the ultimate authority of the board of directors.”¹⁸

The court summarized its decision as follows:

[T]his decision holds, under basic principles of Delaware law, that directors of a Delaware corporation are presumptively entitled to obtain the corporation’s privileged information as a joint client of the corporation and any curtailment of that right cannot be imposed unilaterally by corporate management untethered from the oversight and ultimate authority of the corporation’s board of directors.¹⁹

The court, therefore, held that the Special Committee was entitled to receive the privileged documentation of the Company that it had requested.²⁰

Takeaways

Management of a Delaware corporation (as compared to the board of directors) lacks authority to unilaterally deprive board members of privileged communications of the corporation, and a director’s right to corporate information, including privileged information, is very broad in scope absent limited exceptions.

1. See In re WeWork Litig., 2020 WL 4917593, at *2 (Del. Ch. Aug. 21, 2020).
2. Id.
3. Id. (noting that the complaint asserted two counts, for breach of contract and for breach of fiduciary duty)
4. Id. at *1, *4..
5. Id. at *1.
6. Id. 
7. Id.
8. Id. *7.
9. Id. at *5-6; see also Kalisman v. Friedman, 2013 WL 1668205, at *4 (Del. Ch. Apr. 17, 2013) (“The director’s right to information extends to privileged material.”). 
10. See In re WeWork Litig.,2020 WL 4917593, at *2.
11. Id. at *7.
12. Id.
13. Id. at *6.
14. Id. at *7.
15. Id.
16. Id.
17. Id.
18. Id. (explaining that “[m]anagement concedes [the ultimate authority of the board] in attempting to defend its position when it acknowledges: “‘The Board could, if it wished, direct management to disclose its privileged communications”’).
19. Id. at *8.
20. Id. (emphasizing that the privileged information of the Company “does not concern privileged communications between the New Committee and its own counsel”).

Client Alert 2020-507