In Kalisman v. Friedman, the court examined the extent to which privileged corporate materials may be withheld from a current corporate director and ordered the production of certain privileged materials, including internal law firm discussions. This case indicates the Delaware Chancery Court‟s willingness to carefully consider claims of privilege and delve into the facts and circumstances of the documents‟ creation, statements made within documents, and the parties against whom the privilege is asserted. Companies should be careful not to assume the privilege of documents simply because they were created by a lawyer and should be prepared to defend their privilege designations.
Kalisman v. Friedman
In Kalisman, a director of Morgans Hotel Group Co. brought an action against the remaining directors of the company, seeking to enjoin the implementation of a recapitalization plan. Plaintiff was originally a member of the special committee formed by the board to evaluate potential strategic alternatives for the company. However, after a shareholder controlled by plaintiff announced that it intended to nominate candidates for election and make certain business proposals at the company‟s annual meeting, the remaining members of the special committee began to explore new possibilities. Acting in secret without the knowledge of plaintiff, the special committee decided to propose a recapitalization plan. Plaintiff only learned of the recapitalization plan when company counsel notified him that a special meeting of the board would take place the following day to consider and approve the plan.
Plaintiff filed suit immediately after the recapitalization plan was approved by the board and served document requests on the defendants and subpoenaed the law firms representing the company, as well as the law firm representing the special committee. Defendants asserted privilege over these documents and plaintiff moved to compel.
Vice Chancellor Laster granted plaintiff‟s motion to compel. The court held that a director‟s right to information in a company is "essentially unfettered in nature" and extends to privileged materials. In light of this right, the company could not assert privilege against the plaintiff while waiving privilege as to the remaining directors, reasoning that he has an equal right of access given his capacity as a director and in light of his status as a joint-client of the subpoenaed law firms.
The court also held that such access is not absolute and that two exceptions to a director‟s ability to access privileged materials applied. First, the court noted that a special committee can retain their own legal counsel, which may allow the committee to protect its information from other directors or the board. The court found that since plaintiff was a member of the special committee, he was entitled to access to its materials. However, to the extent a subcommittee was openly formed, privilege could be asserted with respect to advice given to that subcommittee.
The court held that a director‟s right to information in a company is "essentially unfettered in nature" and extends to privileged materials.
Second, the court held that a board or committee can withhold privileged information once sufficient adversity exists between the director and corporation such that the director could no longer have a reasonable expectation that he was a client of the board‟s counsel. The court found that once plaintiff learned that the special committee was meeting in secret and its plan was revealed, he could no longer have a reasonable expectation that he was a client of the board‟s counsel. The court emphasized the fact that the defendants acted in secret and even attempted to mislead plaintiff, and therefore it would be inequitable to give them the benefit of an earlier date for purposes of limiting plaintiff‟s access.
Conclusion: Asserting and Protecting Privilege
Kalisman contains an important lesson regarding the assertion of privilege over attorney materials. Kalisman demonstrates that if a board wishes to assert privilege against certain directors, the board must take care to either openly create a separate committee represented by its own counsel, or make clear that such adversity exists between the director and the corporation so that the director could not reasonably expect to be a client of the board‟s counsel. In either instance, such actions should be taken openly. As demonstrated by Kalisman, courts will likely view attempts to do so in secret unfavorably and may order the production of materials which could otherwise be protected.