Espinoza v. Hewlett Packard Co. (Espinoza II), C.A. No. 6000-VCP (Del. Ch. March 25, 2011)(oral ruling). Read a transcript of the ruling here. According to an article by Phil Milford of Bloomberg, available here, the brief on the appeal is due to the Delaware Supreme Court on May 19.
Although this matter started out as a § 220 suit, the prior 70-page decision in this case was limited to the disclosure (or not) of a letter that former HP CEO Mark Hurd sought, unsuccessfully, to keep sealed. That decision was highlighted on these pages here, and is reported to be the subject of an appeal.
We write today however to focus on the Court of Chancery’s ruling from the bench (actually by phone after a hearing), that denied the request for books and records under § 220 relating to the report after an investigation by counsel for a committee of the board which analyzed the claims against Hurd, the former HP CEO. The claims against Hurd were made in the letter that was the focus of the 70-page decision. The report that was sought presumably addressed whether Hurd should have been fired for cause, as opposed to the ultimate board decision allowing him to resign with a $40 million severance package. The transcript of the hearing that preceded the oral ruling is available here.
Bottom Line: The Court denied the § 220 request for the report of the committee’s counsel based on “attorney-client privilege” and the work product doctrine. In sum, the twin barriers to the § 220 claim were imposed due to the nature of the books and records being prepared in the context of existing claims that were either threatened or had already been filed at the time the counsel to the committee was preparing its report and conducting its investigation – – and no exceptions applied based on the facts of this case. Bloomberg reported on the ruling here.
In order to fully appreciate this oral decision, the background provided in the 70-page earlier ruling on the confidentiality of the letter that led to Hurd’s resignation, available at the above link, would be helpful to read. However, the more important point to make, or more important question to ask, is how the oral ruling in this can be reconciled with the recent § 220 decision in Lampers v. Morgan Stanley, highlighted here, in which the Court of Chancery ordered the production of the report of counsel to the board that explained why the board refused a pre-suit demand to pursue claims against certain officers and directors of the company. Based on my reading of Lampers, a careful and nuanced analysis of the Lampers decision does not support the view that Lampers should be confined to allowing a committee report in a demand-refused context because in part, the Lampers decision was animated by the concern of the Court that the Board did not explain its decision.
The comparision of the two cases may be more challenging due to the absence of a comprehensive written opinion in Espinoza II, although the transcript of the telephonic ruling in this case is lengthy and does provide a substantial explanation. In Espinoza II the Court explained that the report of the counsel to the board was not the same as the document supporting the board’s decision, and the board did not argue that it was relying on its counsel’s report. Thus, the Court in this case reasoned that the counsel’s report was not necessary to expound on the reasons for the board’s decision–especially in light of the many documents already produced regarding the basis for the board’s decision to allow Hurd to resign. The transcript also distinguishes other older Delaware cases.