Ryan v. Gifford, 2008 WL 43699 (Del. Ch., Jan. 2, 2008), read opinion here, is the first  reported Delaware Chancery Court decision of 2008 and follows three prior decisions in this case, which were summarized here, here  and here. The first decision back in February 2007 allowed a claim to proceed based on (now admitted) stock option backdating,

This latest decision is a denial by the Chancery Court of a request for an interlocutory appeal to the Supreme Court of parts of a discovery decision on November 30, summarized here, that required the production of allegedly privileged documents used by the Special Litigation Committee (SLC). It is still possible (but unlikely) that the Supreme Court could still decide to take the appeal if the next step in the interlocutory appeal process is taken. See Supreme Court Rules 41 and 42.

In the course of its decision, the Chancery Court provides the factual background that animates its conclusion. First, the SLC (comprised of one person) was not an independent Special Committee under Zapata Corp. v. Maldonado, nor did the SLC have power to act alone without consulting with other (conflicted) board members. Also, suprisingly, the SLC did not prepare a written report, but the company did issue a press release about the SLC’s conclusions and it did provide additional non-public details of the conclusions to NASDAQ. The court also noted that the director defendants were using the results of the SLC investigation to help them make arguments in the litigation. The court observed that the director defendants controlled the litigation on behalf of the defendant company (as they are a majority of the current board) even though in this derivative case the plaintiff was pursuing the claims on behalf of the company.  In sum, the court made it clear that the defendants were trying to use the attorney-client privilege argument as both a sword and a shield.

The apparent effort of the SLC to avoid creating a paper trail (directors were not permitted to take notes or documents about the oral conclusions of the SLC), was remarkable in light of the amount of data collected. As noted by the Court, in addition to many interviews, the SLC collected about 13 terabytes of electronic data. *

After eliminating software and duplicates, and running search terms, the SLC identified 120 gigabytes of data. Of that amount, 270,000 electronic documents (not including metadata) was reviewed by the SLC’s legal and accounting advisors, as well as 50,000 hard copy documents.

A key point here is that the director defendants specifically relied on the SLC’s conclusions to argue for their exoneration, but still refused to produce those related documents based on a claim of privilege. There is a cognitive dissonance in that argument.

In a way, this short letter opinion also may offer a guide on how not  to operate an SLC.

* Here are a few references to understand the volume of the 13 terabytes of information the SLC gathered. A typical CD-Rom holds about 500 megabytes. A pick-up truck filled with books is about 1 gigabyte. A terabyte is 1,024 gigabytes or about 1,024 pick-up trucks filled with books.