This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

The Delaware Court of Chancery recently ruled, on an issue of first impression, that The We Company’s management did not have the authority to unilaterally preclude a director faction from accessing the office space provider’s privileged information in a dispute over a Japanese investment group with a controlling interest in the matter of In re WeWork Litigation, C.A. No. 2020-0258-AGB, opinion issued (Del. Ch. Aug. 21, 2020).

Chancellor Andre Bouchard’s Aug. 21 opinion ordered We Co. to quickly produce privileged information relating to the circumstances under which management abruptly replaced a specially-appointed two-director committee that had sued investor SoftBank Group Corp. and its ally, SoftBank Vision Fund with a new committee that had agreed to drop the suit.

Delaware law on its head

“It is the board of directors of a corporation—not management—that has the ultimate responsibility for overseeing the affairs of the corporation under 8 Del. C. § 141(a)” but in claiming the right to shield company privileged information from a warring board of directors, “management turns these bedrock principles of Delaware law on their head,” the Chancellor wrote.

He said a special committee of the We Company’s board of directors formed in October 2019 had investigated the circumstances of SoftBank’s proposal to help stave off the company’s liquidity crisis by instituting corporate reforms and investing $3 billion in a stock buy that never transpired.

The special committee, on behalf of We Company, charged in its April Chancery suit, that investors SoftBank and SoftBank Vision Fund breached a contract to use their best efforts to consummate the $3 billion stock buy tender offer; but one month later the company recruited two new temporary directors to form a new special committee to undo the original committee’s work.

New vs. Old Committee

The original committee’s members opposed a motion by the new committee to dismiss their suit and sought information on how the new committee was established and how it may have been influenced by the company’s management, the Chief Executive Officer of which was chosen by SoftBank, he said.  Their suit did not seek access to the new committee’s legal advice.

The Chancellor said in Kalisman v. Friedman, Vice Chancellor J. Travis Laster elaborated on the fundamental principle of Delaware law that a director’s right to information is essentially unfettered in nature,” and “directors of Delaware corporations are generally entitled to share in legal advice the corporation receives.”  Kalisman v. Friedman WL 1668205 (Del. Ch. Apr. 17, 2013).

Kalisman said one exception to that principle is that “a board or a committee can withhold privileged information once 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.”

No exceptions here

But in this case, the board made no decision to withhold privileged information from the special committee after analyzing whether those directors had a “reasonable expectation that [they were] a client of the board’s counsel.”  Instead, “management made that decision unilaterally” he said.

“Directors of a Delaware corporation are presumptively entitled to obtain the corporation’s privileged information as a joint client of the corporation” he said in ordering production, “and any curtailment of that right cannot be imposed unilaterally by corporate management untethered from the oversight and ultimate authority of the corporation’s board of directors.”