In Kalisman, et al. v. Friedman, et. al., Kalisman, a director of Morgans Hotel Group Co., sued the other members of the Company's board of directors challenging the board's actions relating to the adoption of a recapitalization plan. In December 2011, the board established a special committee, which included Kalisman, to evaluate potential strategic alternatives. The special committee's efforts stalled in November 2012 but were resumed in March 2013, when one of the Company's shareholders, OTK Associates LLC, which was founded by Kalisman, announced that it would nominate an alternative slate of directors and make business proposals at the Company's annual meeting in May 2013. Kalisman alleged that as a result of the announcement, the defendant directors secretly began searching for an alternative deal and secured an alternative recapitalization plan while keeping Kalisman in the dark. Kalisman alleged that he first heard of the defendants' plan the day prior to a scheduled board and special committee meeting, upon receipt of the notice of such meetings. When the special committee met the next day, it voted to create a subcommittee which excluded Kalisman. Later that same day, the board met and approved the recapitalization. Kalisman filed a complaint, sought immediate discovery and subpoenaed the law firms retained by the Company and the special committee. Defendants refused to produce documents asserting the attorney client privilege and work product doctrine.
The Court recognized Kalisman's right to access the requested information, both in his capacity as director of the Company and also in light of his status as a joint client of the subpoenaed law firms. The Court explained that 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 and that the director's right to information extends to privileged material. The rationale for this rule is that all directors are responsible for the proper management of the corporation, and thus, should be treated as a joint client when legal advice is rendered to the corporation through one of its directors. However, the Court recognized certain limitations on the director's ability to access privileged information. The Court explained that a board or a committee can withhold privileged information once sufficient adversity exists between the director and the corporation such that the director could no longer have a reasonable expectation that he was a client of the board's counsel. The Court held that this adversity exception applied from the date the subcommittee, which excluded Kalisman, was formed. Accordingly, the Court held that prior to the formation of the subcommittee, Kalisman was a member of the special committee and as such he was a joint client of its retained counsel and therefore entitled to otherwise privileged documents generated before the creation of the subcommittee.
Kalisman, et al. v. Friedman, et al., C.A. No. 8447-VCL, 2013 WL 1668205 (Del. Ch. Apr. 17, 2013).