The Delaware Court of Chancery has issued a decision in the ongoing stock option litigation regarding Maxim Integrated Products, Inc., Ryan v. Gifford, Civ. Action No. 2213-CC (November 30, 2007), potentially limiting the protection of the attorney-client privilege in cases where a special committee of a company’s board shares its report or findings with third parties, including the board itself.

The Decision

Shareholders of Maxim brought a derivative action against several of the company’s officers and directors based on allegations of stock option grant backdating. As several current directors of the company were named in the lawsuit, Maxim formed a Special Committee (the SC) of independent directors to review the claims and the SC retained independent counsel. Throughout its investigation, committee counsel communicated with the members of the SC and eventually produced a report which was presented to the SC and Maxim’s board of directors.

In discovery, plaintiffs sought discovery of the SC report, all communication between the SC and its counsel regarding the report, as well as all notes and memorandum from counsel’s investigative interviews. Maxim asserted attorney-client privilege to protect this material from disclosure. Maxim asserted the privilege on behalf of both the SC, as to communications between the SC and counsel, and further claimed that counsel’s communication to Maxim and its board was privileged as Maxim and the SC shared a joint privilege.

Chancellor Chandler first noted that while he was skeptical that Maxim could in fact assert the privilege between the SC and its counsel, he would assume for purposes of the motion that this was permissible.1 The court then went on to find that Maxim could not assert the privilege against its shareholders seeking to prove a breach of fiduciary duties. The court found that under Sealy Mattress Co. of New Jersey, Inc. v. Sealy Inc., 1987 WL 12500 (Del. Ch. June 19, 1987), plaintiffs had shown that the material sought was unavailable from other sources and was required to prove any claim of breach of fiduciary duty.

Perhaps more importantly, the court went on to find that even if Maxim and the SC had a joint privilege, the actions of the SC and its counsel in sharing the report with the board, which included several of the named defendants in the lawsuit, and a second law firm who acted as SEC counsel for Maxim and represented individual director defendants, waived any privilege that may have existed. The court reinforced that “communications made in the presence of third persons not for the purpose of seeking legal advice act as a waiver of the attorney-client privilege.” Ryan at 7. While there does exist an exception for disclosure among parties with a common interest, according to the court, in order for the exception to apply the third party must have interests that are “so parallel and non-adverse that, at least with respect to he transaction involved, they may be regarded as joint venturers.” Ryan at 7 (quoting Saito v. McKesson HBOC, Inc., No. 18553, 2002 WL 31657662, at *4 (Del. Ch. Nov. 13, 2002).

In this case, the Court found that the director-defendants and their counsel did not share a common interest with the SC. As the SC was formed to investigate the potential wrongdoings of the directors named in the lawsuit, the relationship was more adversarial than cooperative. Moreover, even though there was a potential argument that the named directors were present at the meeting fulfilling their fiduciary duties as board members, this was overcome by the fact that they were now seeking to rely on the report to exculpate themselves in litigation. Thus, any privilege was waived as to the report, and as such waiver acted as a subject matter waiver, privilege was waived as to all prior communications between counsel and the SC.

In contrast, in reviewing the claim of work product with respect to counsel’s interview memos and notes, the court indicated that it was inclined to protect any opinion work product and ordered the materials produced for in camera inspection to confirm that the material sought did in fact meet the definition of opinion work product.

Analysis and Impact

Although almost all lawyers representing either a special committee or the company itself recognize the distinction between the two, sharing of information between committee counsel and the company is common, and indeed where the SEC or DOJ is involved often necessary. Likewise, in today’s environment it is near certain that where any allegation of wrongdoing is unearthed, plaintiff’s counsel will bring a derivative suit seeking to name as many of the company’s current officers and directors as possible. The opinion in Ryan highlights the dangerous conflict between these two facts.

In evaluating whether to share information between a special committee and the company board of directors, counsel for both entities need to evaluate the likelihood that the non-committee members of the board are or will be named in litigation and be placed in an adverse position to the committee, resulting in possible waiver. Also, counsel need to be aware of the problem of subject matter waiver and recognize that sharing just the report may not necessarily compartmentalize the risk.

Counsel should also be cognizant of the difference between attorney-client privileged material, fact work product and opinion work product and how a reviewing court is likely to analyze these different categories of material.

One additional observation arises out of the court’s Zapata footnote. Ryan at 5, n.2. Where a special committee is given formal authority to assert claims on behalf of the company, such as a special litigation committee, there appears to be a suggestion in the court’s opinion that it will be much harder to find a joint privilege even if the non-committee directors are not defendants. Committees with explicit reporting responsibilities to the board will likely be in a better position to assert a joint privilege.