A recent Delaware Court of Chancery decision offers guidance on how a corporation may best address document requests by a conflicted director whose interests were adverse to those of the company.
The case arose from a discovery controversy between competing factions of the board of a large entertainment company. Directors associated with the controlling stockholder had requested production of certain privileged materials. This request was opposed by a special board committee formed to evaluate a transaction that was the subject of much of the controversy. The Chancellor ruled that, among other things, a director’s right to information can be limited in certain ways, including circumstances in which “sufficient adversity exists between the director and the corporation such that the director could no longer have a reasonable expectation that he was a client of the board’s counsel.”
This decision arose from litigation involving a public company and directors appointed by a controlling shareholder who had been opposed to the underlying transaction. Nevertheless, the court’s ruling may be of some relevance to boardroom controversy within a nonprofit corporation as well. There are increasing examples within the nonprofit health care sector of directors who are in a conflict of interest situation, or are otherwise adverse to the interests of the company, and who seek certain categories of corporate information to further their individual objectives. While director information rights are ordinarily interpreted as broad, there may be situations in which adversity or conflict can serve as a basis for limiting information rights. Decisions such as this recent ruling may be supportive of any health system response to such an information request.