Corporations use internal investigations to achieve a number of possible goals—to assess troubling facts that have been reported by reliable sources; to obtain sound legal advice regarding their rights, obligations and remedies relating to those facts; to obtain more favorable treatment from regulators who may be concerned by those facts; and to obtain recommendations as to how the company should learn from the situation and improve its conduct going forward. Corporations generally conclude that they are best able to meet these goals if the group that is making the assessment (typically a special committee of the corporation’s board of directors), as well as the professionals who advise that group (typically a specially retained outside law firm), are genuinely independent.

But if the investigation is to achieve its goals, the assessment and the advice must be communicated to the people who can act on them. The corporation and the regulators frequently need to know the investigation’s findings and recommendations. Whenever independent legal assessments and advice are communicated to anyone other than the direct client, however, there may be a waiver of the attorneyclient privilege that otherwise would protect the assessments and advice from being disclosed in litigation. This problem of waiver has arisen often after the findings of corporate internal investigations have been disclosed to regulators. In contrast, the consequence of disclosure within the corporation itself has received far less attention. That is, until now.

In the recent Delaware Chancery Court case of Ryan v. Gifford, Civil Action No. 2213-CC, 2007 Del. Ch. LEXIS 168, at *7-14 (Del. Ch. Nov. 23, 2007), Chancellor William B. Chandler III held that where a special committee retains outside counsel to investigate corporate wrongdoing in response to litigation, the special committee waives the attorney-client privilege with committee counsel if it discloses the investigation’s results to the full board, including to board members accused of the misconduct under investigation.

In Ryan, the board of directors of nominal defendant Maxim Integrated Products, Inc. formed a special committee to investigate derivative plaintiffs’ allegations of stock option backdating. The special committee retained Orrick Herrington & Sutcliffe LLP to conduct the investigation. After the investigation had been completed, the special committee made an oral presentation of its final report to Maxim’s full board of directors. Attending that presentation were board members who had been named as individual defendants in the litigation. Attorneys from Quinn Emmanuel, who represented Maxim in connection with an SEC investigation and the individual director defendants in the civil lawsuit, also attended the presentation. According to Chancellor Chandler, the oral report was “more than a mere acknowledgement of the existence of the report and instead disclosed such details that, for example, attendees were directed to turn in any notes taken during the presentation at the end of the meeting.”

The plaintiffs in Ryan filed a motion to compel Orrick, Maxim, and the special committee to produce all communications that occurred among them during the course of the investigation and during the special committee’s oral presentation. Relying on Garner v. Wolfinbarger, 430 F.2d 1093, 1103-04 (5th Cir. 1970), cert denied 401 U.S. 974 (1971), and Sealy Mattress Co. Of New Jersey, Inc. v. Sealy, Inc., No 8853, 1987 Del. Ch. LEXIS 451 (Del. Ch. June 1987), both of which recognize a derivative plaintiff ’s right, upon a showing of good cause, to gain access to a corporation’s otherwise privileged communications with counsel, Chancellor Chandler found first that even if Maxim could rely on the special committee’s privilege to protect Maxim’s communications with Orrick regarding the investigation and report, “the privilege [did] not apply...because plaintiffs’ showing of good cause vitiates it.” The Court found that plaintiffs had established good cause to require the production of communications between the company and special committee counsel because the information contained in the report was not available from other sources and was particularly important to plaintiffs’ pursuit of their claims.

Chancellor Chandler then went a step further and held that the special committee had waived its own attorney-client privilege over its communications with Orrick regarding the investigation. He recognized that there is a “common interest” exception to the waiver doctrine, which extends the protections of the attorney-client privilege to disclosures of communications among non-adverse parties who share a common interest in the litigation. But the Chancellor found that even if this exception could apply to the special committee’s communications with Maxim and Orrick, the special committee’s detailed oral report of the investigation’s conclusions to the full board

constitutes a waiver of privilege because the client, the Special Committee, disclosed its communications concerning the investigation and final report to third parties – the individual director defendants and Quinn Emmanuel – whose interests are not common with the client, precluding application of the common interest exception to protect the disclosed communications.

Since the individual director defendants were accused of the very wrongdoing that the special committee was tasked to investigate, the Court concluded that “the relationship [between those board members and the special committee was] more akin to one adversarial in nature” and thus the special committee’s attorney-client privilege did not survive.

Chancellor Chandler acknowledged that Quinn Emmanuel’s “dual capacity as counsel for both Maxim (before the SEC) and the individual defendants may confuse the issue of whether the director defendants attended the...meeting in a fiduciary – not individual – capacity.” But because the director defendants had affirmatively relied on the report’s findings for exculpation, the Chancellor concluded that the director defendants had attended the board meeting in their individual capacity and that the interests of these defendants were potentially adverse to the interest of the special committee. Accordingly, the Court required the production of communications related to the final report, including any material distributed or collected during the oral presentation.1

Based on this decision, a special committee investigating corporate misconduct should conduct a careful analysis with respect to waiver of the attorney-client privilege before communicating its findings within the corporation. In fact, Ryan teaches that a special committee should be careful even when communicating those findings within the board of directors. In considering to whom it should present an investigation’s findings, it would be wise for a special committee to focus on who genuinely needs to know the findings and, as important, whether those individuals have been implicated in the investigation and are therefore potentially adverse to the special committee.