Shareholder suits can involve tricky privilege issues. Corporate directors and officers often invoke the attorney-client privilege in an effort to avoid disclosing attorney communications to shareholders. Some courts, however, recognize a “fiduciary exception” to the privilege, which allows shareholders to access some fiduciary-attorney communications. Last year, the Delaware Supreme Court recognized the fiduciary exception, and recent chancery cases have clarified its applicability.
In one case, a group of shareholders filed a § 220 action to inspect records. The shareholders sought to investigate a potential breach of fiduciary duty in connection with allegations that company officers illegally bribed foreign officials. The company voluntarily produced relevant documents, but it withheld several documents based on a claim of attorney-client privilege. Affirming the Chancery Court, the Delaware Supreme Court held that the fiduciary exception applies in plenary stockholder proceedings and § 220 actions. The court stated that the fiduciary exception “allows stockholders of a corporation to invade the corporation’s attorney-client privilege in order to prove fiduciary breaches by those in control of the corporation upon showing good cause.” The court cautioned, however, that the “good cause” requirement poses a high bar for shareholders: the “fiduciary exception . . . is narrow, exacting and intended to be very difficult to satisfy.” Relying on the Fifth Circuit’s decision in Garner v. Wolfingbarger, 430 F.2d 1093 (5th Cir. 1970), the court found the fiduciary exception applicable largely because the shareholders had presented a colorable claim of a criminal violation and had offered evidence of wrongdoing in the company’s internal investigation.
This year, a chancery master issued an opinion expanded on the prior decision and explained when a Delaware court might find “good cause.” In De Vries v. Diamante Del Mar, L.L.C., 2015 WL 3534073 (Del. Ch. June 3, 2015), the master explained that Garner’s eight-factor test for determining whether a shareholder has established “good cause.” The factors are:
- The number of shareholders and the percentage of stock they represent;
- The bona fides of the shareholders;
- The nature of the shareholders’ claim and whether it is obviously colorable;
- The apparent necessity or desirability of the shareholders having the information and the availability of it from other sources;
- Whether, if the shareholders’ claim is of wrongful action by the corporation, it is of action criminal, or illegal but not criminal, or of doubtful legality;
- Whether the communication is of advice concerning the litigation itself;
- The extent to which the communication is identified versus the extent to which the shareholders are blindly fishing;
- The risk of revelation of trade secrets or other information in whose confidentiality the corporation has an interest for independent reasons.
De Vries, 2015 WL 3534073, *6. The master noted that the most important factors are the third, fourth, and seventh factors. The master downplayed the importance of the first factor. In the context of an action to inspect records, the master noted, a shareholder has to meet a lower bar to establish a “colorable claim” than in a plenary action. The shareholder need only show a credible basis for the court to infer mismanagement or wrongdoing. Actions to inspect records, therefore, may prove to be a popular vehicle for shareholders seeking to uncover privileged communications.
These cases serve as a reminder to officers and counsel that the attorney-client privilege is not without exceptions. In Delaware, the fiduciary exception is “narrow, exacting and intended to be very difficult to satisfy.” Indeed, corporate officers often will be able to distinguish cases which do not involve credible claims of criminal activity by officers. But, particularly in the context of actions to inspect records, Delaware courts appear willing to order the production of at least some attorney-client privileged communications.