On Nov. 30, the Delaware Court of Chancery held that the plaintiffs in a shareholder derivative action were entitled to receive in discovery information relating to a Special Committee’s report of the findings of an internal investigation made to the company’s full Board of Directors, as well as communications between the Special Committee and its counsel. The decision in Ryan, et al. v. Gifford, et al., Civ. Act. No. 2213-CC, 2007 WL 4259557 (Del. Ch. Nov. 30, 2007), by Chancellor William B. Chandler III, rejected the arguments made by the company that the information was protected from disclosure by the attorney-client privilege.

The decision is significant for two principal reasons. First, it serves as a reminder that under Delaware law, a corporation cannot be assured of the ability to assert the attorney-client privilege in a shareholder derivative lawsuit. If the plaintiff-shareholder can demonstrate “good cause,” he or she may be able to gain access to otherwise privileged communications between the corporation and its attorneys. Second, the decision should put members of Special Committees and their outside counsel on notice that the presentation of a final report to the full Board of Directors could result in a waiver of the attorney-client privilege—on the theory that the Special Committee and the other members of the Board of Directors do not share a common interest—and thereby subject the Special Committee’s findings and communications with its attorneys to disclosure.

Ryan is a shareholder derivative action arising out of alleged stock options backdating at Maxim Integrated Products, Inc. (“Maxim”), a company that designs and manufactures integrated circuits used in microprocessor-based electronic equipment. The shareholder plaintiff in Ryan alleged that Maxim’s directors breached their duties of due care and loyalty by approving or accepting backdated stock option grants in violation of the terms of Maxim’s shareholder-approved stock option plans. In response to this lawsuit and to other litigation challenging Maxim’s grants of stock options, Maxim’s Board of Directors formed a Special Committee to investigate the backdating allegations. The Special Committee, in turn, retained the law firm of Orrick Herrington & Sutcliffe LLP (“Orrick”) to conduct the internal investigation.

In the course of discovery in Ryan, the plaintiff moved to compel the production of two categories of documents from Maxim (including its Special Committee) and Orrick: (i) the communications between Orrick and the Special Committee that occurred during the internal investigation, and (ii) documents relating to the final oral report of the Special Committee, as presented to Maxim’s full Board of Directors. Orrick and Maxim asserted that these communications were protected from disclosure by the attorney-client privilege because Orrick served as the attorney for the Special Committee. Maxim also claimed that because the Special Committee was formed at its direction in response to the ongoing litigation, Maxim and its Special Committee shared a joint privilege.

In its Nov. 30 memorandum decision, the Court rejected the argument that attorney-client privilege allowed Maxim and Orrick to withhold these documents. First, the Court concluded that Maxim could not assert the attorney-client privilege, in the context of the shareholder derivative action, because the plaintiff made the required showing of “good cause.” Under Delaware law, communications between a corporation and its attorney are not necessarily protected from disclosure to shareholders by the attorney-client privilege. See Deutsch v. Cogan, 580 A.2d 100, 104-05 (Del. Ch. 1990) (following Garner v. Wolfinbarger, 430 F.2d 1093, 1103-04 (5th Cir. 1970)). Rather, under the “Garner doctrine,” which is also recognized in many other jurisdictions, a shareholder who initiates a derivative action can overcome a corporation’s claim of attorneyclient privilege if he or she demonstrates that there is “good cause” to negate the corporation’s assertion of the privilege. Id. Whether good cause is shown turns on a balancing test that considers a host of factors, including whether the shareholder has presented a colorable legal claim, the necessity of the information and its availability from other sources, and the extent to which the information requested is identified with particularity. No single factor is determinative in this analysis.

Here, the Court ruled that the plaintiffs’ showing of good cause “vitiates” any assertion of privilege. Chancellor Chandler found that several factors strongly favored disclosure. He concluded that the plaintiffs demonstrated a colorable legal claim; that the information sought by the plaintiffs was unavailable from other sources; and that the plaintiffs identified the requested information with great specificity (so as to make it different from the proverbial fishing expedition). Of “particular importance,” he found, was that the information relating to the Special Committee’s investigation was both “paramount” to the plaintiffs’ ability to prove a breach of fiduciary duty and unavailable from other sources. Accordingly, Chancellor Chandler ruled that the plaintiffs demonstrated the “good cause” necessary to allow a shareholder to obtain documents that might otherwise have been privileged.

The Court also held that, even if Maxim and its Special Committee did share a joint attorney-client privilege that was not vitiated under the Garner doctrine, the privilege was waived when the Special Committee presented its final oral report to the full Board of Directors on January 18 and 19, 2007 (more than six months after the initiation of this lawsuit). Directors who did not serve on the Special Committee, as well as attorneys from an outside law firm who represent several of the defendant directors in the derivative action and also appear to represent Maxim in proceedings before the SEC, attended this presentation. The Court explained that by disclosing attorney-client confidences in the presence of “third parties” who, in the Court’s view, lacked a common interest with the Special Committee (i.e., directors who were not on the Special Committee and their attorneys), the Special Committee waived the privilege. Chancellor Chandler determined that there was no common interest between the Special Committee and the other directors because the Special Committee, which was “formed to investigate wrongdoing and in response to litigation in which certain directors were named as individual defendants,” was in a necessarily “adversarial” relationship with these directors. The Court thus concluded that the common interest exception did not apply to extend the protection of the attorney-client privilege to communications relating to the Special Committee’s final report, including any materials distributed or collected at meetings between the Board members and the Special Committee.

The Court further concluded that “this partial waiver”—namely, the presentation of the oral report—“operated as a complete waiver for all communications regarding this subject matter.” Therefore, the plaintiffs were also entitled to receive “all communications between Orrick and the Special Committee related to the investigation and final report.”

Finally, the Court addressed Orrick’s claim that certain of its documents were also protected under the work product doctrine. Orrick asserted that its interview notes were not transcripts or verbatim accounts of witness statements, but rather contained its attorneys’ thoughts and impressions. The Court held that it was not inclined to order the production of opinion work product, but that it would require Orrick to produce its interview notes for in camera inspection by the Court. Depending on the nature of the notes, the Court reserved the possibility of ordering the production of these documents, in part or in redacted form.