Directors Have a Presumptive Right to a Company’s Privileged Information Says Chancery Court
In a case of first impression, the Delaware Court of Chancery recently considered whether management could restrict company directors’ access to privileged information between the company (via management) and its counsel. Chancellor Bouchard wrote that in most circumstances, it cannot. The case offers guidance to companies and directors on the joint-client status of directors when companies seek legal advice and the scope of a director’s right to privileged communications when a company seeks legal advice. The case, In re WeWork Litigation, No. 2020-0258, 2020 WL 4917593 (Del. Ch. Aug. 21, 2020 ) can be read here: https://courts.delaware.gov/Opinions/Download.aspx?id=309690.
The case arises out of a lawsuit filed on behalf of The We Company (Company) by a special committee of its board of directors against SoftBank Group Corp (SoftBank), alleging breach of contractual obligations owed to the Company. The special committee sought access to privileged communications between the Company’s management and the Company’s counsel regarding the circumstances that gave rise to the special committee’s creation in order to oppose the Company’s motion for leave to voluntarily dismiss the complaint.
Following a change of control of management with power held by Softbank, the Company argued that the special committee is adverse to the Company and should be barred from accessing communications between the Company’s management and the Company’s counsel. The special committee argued that the Company’s position inverts Delaware law’s oversight structure, which provides that a board and, not management, is responsible for overseeing the affairs of a corporation. The special committee also argued that as the Company did not consider it adverse when the special committee was formed, the special committee should not be deemed adverse to the Company simply because SoftBank now controlled the Company’s management. The special committee reasoned that because it is not adverse to the Company, it is a joint client of the company when legal advice is rendered to the Company through officers and directors.
The court framed the novel question before it 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?
In answering, “no,” the court reiterated the “essentially unfettered” nature of a director’s right to corporate information absent three limitations: (1) via a pre-existing agreement among the contracting parties; (2) where a board openly and with the knowledge of excluded directors appoints a special investigatory committee. There, the special committee’s communications with its counsel regarding the investigation is properly protected ; or (3) where 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.” The court found none of the limitations applicable. The court also reiterated the “cardinal precept” of Delaware law that “the business and affairs of a corporation . . . shall be managed under the direction of a board of directors. . . .” In short, directors are joint clients of the corporation when it seeks legal advice.
The court summarized its holding:
[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.
The key takeaway for company management and directors is that under Delaware law, officer and director communications on behalf of a corporation with its counsel (in house or outside) are accessible by directors absent three very specific situations.