Upon a showing of good cause, a stockholder could overcome a corporation’s attorney-client privilege when suing the corporation for acting contrary to the stockholders’ interests, the Delaware Supreme Court has ruled. Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust Fund IBEW, No. 614, 2013 (July 23, 2014).
In so ruling, the Court firmly adopted an exception to the attorney-client privilege, finding stockholders may be entitled to pre-trial discovery of certain privileged material in limited circumstances. The exception, called the “Garner doctrine,” first was articulated by the U.S. Court of Appeals for the Fifth Circuit in Garner v. Wolfinbarger, 430 F.2d 1093, 1103-04 (5th Cir. 1970).
The Delaware Supreme Court upheld an order directing the company to produce privileged documents, including e-mails and memoranda prepared by its general counsel, to the stockholder demanding the documents.
The controversy began when the pension trust fund (“IBEW”), a Wal-Mart stockholder, sought review of the company’s privileged documents relating to its internal investigation of alleged violations of the Foreign Corrupt Practices Act in Mexico. When the company refused to produce the documents, IBEW sought the documents through a “Section 220 litigation” under Delaware law. A Section 220 litigation permits a company’s stockholder to sue to inspect a corporation’s books and records. IBEW argued the privileged documents it demanded were necessary to determine if the company’s directors had breached their fiduciary duty to stockholders.
The Fifth Circuit held in Garner:
where the corporation is in suit against its stockholders on charges of acting inimically to stockholder interests, protection of those interests as well as those of the corporation and of the public require that the availability of the privilege be subject to the right of the stockholders to show [good] cause why it should not be invoked in the particular instance.
In Garner, the plaintiffs brought claims under the Securities Act of 1933 and the Securities Exchange Act of 1934, among other statutes, arising out of a corporation’s allegedly fraudulent public offering of stock. During pre-trial discovery, the plaintiffs sought material focused on the legal advice provided by the company’s then-attorney about the securities offering. The district court held the corporation could not invoke the attorney-client privilege.
The Fifth Circuit disagreed, holding the corporation could invoke the privilege, but the privilege was no longer “inflexibly absolute” or “totally unavailable.” The Fifth Circuit stated that “management has duties which run to the benefit ultimately of stockholders” and corporate management should act “wholly or partly in the interests of others,” i.e., the stockholders. It provided a list of factors to be considered in determining the existence of good cause. These include:
- the number of stockholders and stock percentage they represent,
- the bona fides of the stockholders,
- the nature of the stockholders’ claim and whether it is “obviously colorable,”
- the necessity of the information and availability of the information from other sources,
- whether the alleged acts are criminal in nature or of “doubtful legality,” and
- the extent to which the communication is identified, as opposed to being sought through “blind fishing” by the stockholder.
Garner, while often cited, has rarely been followed in the nearly five decades since it was decided. California, for example, is just one state that refuses to recognize the Garner doctrine and prohibits stockholders from discovering privileged material despite a showing of good cause. Holes v. Superior Court, 157 Cal. App. 3d 1199, 204 Cal. Rptr. 111 (1984).
After reviewing the Garner factors, the Delaware Supreme Court upheld the lower court’s order directing the company to produce privileged documents to IBEW, including e-mails and memoranda prepared by its general counsel.
While the Delaware Supreme Court’s decision in this case could revive a relatively dormant doctrine, whether other states will follow Delaware’s lead in adopting theGarner doctrine is unclear. IBEW may strengthen stockholders’ arguments to access privileged material, but the Court cautioned that this fiduciary exception to the attorney-client privilege “is narrow, exacting, and intended to be very difficult to satisfy.” Its multi-factor analysis to determine whether a plaintiff has established “good cause” to overcome the attorney-client privilege is fact-sensitive and must be determined on a case-by-case basis.
As many of the Garner “good cause” factors are beyond a corporation’s control, companies should not assume their privileged documents regarding internal investigations are shielded fully from pre-trial discovery.