In Chambers v. Gold Medal Bakery, Inc., 464 Mass. 383, 983 N.E.2d 683 (2013), the Massachusetts Supreme Judicial Court (“SJC”) considered whether a closely-held corporation, and its legal counsel validly could invoke attorney-client privilege and the litigation work product doctrine to shield corporate documents from discovery by director-shareholders of the corporation who had brought claims against the corporation and its other director-shareholders. Reversing the lower court, the SJC held because the plaintiffs’ interests were sufficiently adverse to those of the corporation with respect to the contested documents, the assertion of privilege and work product protection was valid, and the plaintiffs were not entitled to production of the documents.
Chambers involved a dispute between two groups of shareholders of Gold Medal Bakery, Inc., (“Gold Medal” or the “Corporation”), a closely-held corporation engaged in the wholesale bakery supply business. The shareholders on each side of the litigation collectively owned fifty percent of Gold Medal’s stock and occupied two of its four seats on the Board of Directors. The shareholders on the defense’ side of the lawsuit, who were officers of the Corporation, had a more active role in Gold Medal’s day-to-day operations than did the plaintiffs. At the time of the litigation, the plaintiffshareholders had been attempting for several years to obtain a buyout of their shares by the Corporation or by the other shareholders.
The lawsuit before the Court in Chambers (the “2009 Suit”) arose out of the defendants’ alleged violation of a settlement agreement (the “Settlement Agreement”) previously entered into by the same two groups of Gold Medal’s shareholders. The Settlement Agreement resolved an earlier litigation (the “2007 Suit”) which arose when the plaintiff-shareholders were denied access to certain corporate records, which they sought for the purpose of determining a sale price for the potential buyout of their shares.
In the subsequent 2009 Suit, the plaintiffs alleged the shareholderdefendants had breached the Settlement Agreement, which the plaintiffs alleged permitted them access to the requested documents and required the parties to engage in good faith negotiations for the anticipated buyout of the plaintiffs’ Gold Medal stock. The plaintiffs further claimed the defendant-shareholders wrongfully froze them out of the Corporation’s affairs, financially damaged the Corporation through their mismanagement, and wrongfully denied the plaintiffs access to financial information about the Corporation in order to conceal their wrongdoing and “to achieve a buy-out or redemption of the [p]laintiffs’ shares on unfavorable terms that provide less than fair value for the shares.” The plaintiffs brought both direct claims against the individual shareholder-defendants, and also (acting in their capacity as shareholders and directors) asserted derivative claims against the Corporation. Additionally, the plaintiffs asserted claims in the 2009 Suit against the Corporation’s legal counsel (“the Law Firm”) who was the keeper of Gold Medal’s corporate records.
As part of the litigation in the 2009 Suit, the plaintiffs served a subpoena duces tecum on the Law Firm seeking to obtain various documents, including documents generated by the defendants in anticipation of, or otherwise concerning, the 2007 and 2009 Suits. The defendants objected to the subpoena, and asserted all of the requested documents were protected from discovery under the attorney- client privilege and/or work product doctrine.
The trial court affirmed the ruling of a discovery master holding the plaintiffs were entitled to the documents because as part of Gold Medal’s control group, the plaintiff-shareholders could waive the Corporation’s attorney-client and work-product privileges. The lower court adopted the discovery master’s further reasoning that as joint corporate managers, the Corporation’s directors “stand in the same position with respect to communications with corporate counsel as they would be if they were joint clients of corporate counsel.”
On direct interlocutory appeal, the SJC considered whether attorneyclient privilege and/or the litigation work product immunity could be invoked to protect the documents from discovery. In answering that question, the Court reiterated the established principles that “a director has fiduciary duties to the corporation irrespective of his involvement in day-to-day operations,” and generally cannot be expected to satisfy those responsibilities without access to basic corporate information. Thus, the Court explained, under Massachusetts law, “a corporate director who is not adverse to the corporation is, as a general matter, entitled to equal access to legal advice furnished to other board members.” Further, the SJC noted that a non-adverse co-director’s usual right to access legal advice given to the Corporation is particularly important in the close corporation context where shareholders owe one another fiduciary duties and where there is a greater risk of potential minority freeze out.
Consistent with these general principles, the SJC held that the plaintiffs in Chambers were entitled to access the requested documents, except to the extent that their interests with respect to any particular document were adverse to those of the Corporation.
In determining whether the plaintiffs’ interests with respect to the documents were aligned with the corporation’s interests, the Court looked to the evidence in the record concerning the plaintiff’s motivation underlying the 2009 Suit. The plaintiffs characterized the 2009 Suit as “predominantly derivative,” and argued that any discussion of a potential buyout of their shares was in the Corporation’s best interests. The plaintiffs further contended Gold Medal’s status as a named defendant was only “a matter of form” so that the plaintiffs and Gold Medal were “not true adversaries.”
The SJC rejected those arguments. The Court observed that the 2009 Suit “arose in part out of an inability to obtain requisite information to conduct a valuation of Gold Medal for the plaintiffs to then use to obtain a value maximizing sale of their shares.
Thus, although recognizing that the 2009 Suit was “likely the product of the plaintiffs’ mixed-interests, only some of which are adverse to the corporation”, the SJC found that “a significant motivating factor” for the plaintiffs in seeking the requested documents was the self-interested purpose of maximizing the purchase price of the plaintiff-shareholders’ shares. This interest, the Court held, was adverse to Gold Medal, who as a potential purchaser of the plaintiffs’ shares was interested in minimizing the stock price in any potential buyout. Thus, the SJC concluded that the plaintiffs' interests were adverse to Gold Medal with regard to the 2007 and 2009 Suits, and that with respect to issues where adversity existed the plaintiffs therefore were not entitled to access documents qualifying as attorney- client privileged and/or work product protected materials. The Court explained that to hold otherwise would not only frustrate the policy rationale underlying the attorney client privilege and work product doctrine, but also would give the plaintiffs an unfair advantage in the litigation.
The Chambers decision is significant as it announces for the first time the SJC’s recognition of the principle that a director whose interests are adverse to a corporation may not access the corporation’s confidential communications with its legal counsel for use in advancing the director’s adverse interests against the corporation. Significant also in the Chambers decision, however, are two limitations to that principle recognized by the Court.
First, in its holding, the Court was careful to distinguish between, on one hand, Gold Medal's communications with the Law Firm regarding the 2007 and 2009 Suits, which were not discoverable, and, on the other hand, documents regarding underlying facts of the Corporation’s financial health independent of the 2007 and 2009 Suits, which were discoverable. In this regard, the SJC emphasized because attorney-client privilege does not immunize underlying facts from discovery simply because a client has disclosed those facts to an attorney, “[t]he plaintiffs should not be denied access to basic financial information about Gold Medal just because [the Law Firm] is keeper of Gold Medal's corporate records.”
Second, the SJC cautioned in Chambers that the analysis for “determining when a director has interests adverse for attorney-client privilege purposes, particularly in the unique context of a close corporation . . . is fact specific and necessarily depends upon the circumstances of each case.” Here, the Court found particular significance in the fact that the plaintiffs had brought multiple suits against the Corporation over the course of only a few years, each time represented by separate counsel, and that “by the terms of their own pleadings, the plaintiffs have been pursuing a global buyout of their Gold Medal shares” throughout that period of time.
Further clarification as to precisely what other circumstances may constitute sufficient adversity of interest will have to await subsequent decisions of the Massachusetts Courts. Under Chambers, however, if presented with a request for corporate documents from a director having interests potentially adverse to the corporation, counsel properly should advise the corporate client to assert attorney- client and/or litigation work product privileges with regard to any documents concerning the issue on which the potential adversity exists.