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.
A discovery ruling by the Delaware Court of Chancery in a contest between two board factions for control of Adkins Energy LLC allowed plaintiff Pearl City Elevator, Inc. access to the attorney-client-privileged documents of a rival faction only in areas where Pearl’s interests were not adverse to those of Adkins’ in Pearl City Elevator, Inc. v. Gieseke, et al. C.A. No. 2020-0419-JRS letter opinion (Del. Ch. Sept. 21, 2020). The Court also addressed standing issues in a manner that contrasts with the conclusion by the same jurist in an earlier, unrelated case.
Vice Chancellor Joseph Slights’ Sept. 21 ruling was a split decision on investor Pearl City’s motion to compel production of documents generated by the law firm hired to advise Adkins three general board members who opposed a claim by Pearl’s three board members that they now owned enough Adkins stock to appoint a tie-breaking seventh representative.
As a limited liability company, Adkins could sell ownership interests to limit risk like a corporation, but could set its corporate governance rights and responsibilities by contract rather than by Delaware state law; and one of those rights allowed Pearl to appoint a seventh board representative after it acquired 56 % of Adkins.
When the Adkins board members questioned the validity of the share purchases and got advice from a law firm separate from the rest of the boar. Pearl subpoenaed the relative documents, claiming their rivals could not shut them out simply because they had disagreements according to the court.
Like the directors of corporations, LLC managers normally have unfettered access to even attorney-client-privileged or work product privileged information, but there are three exceptions:
(1) A board member can limit his or her rights by agreement ex ante.
(2) A board can form a special committee excluding the director, and that committee can engage legal counsel, and then that committee’s communications would be protected.
(3) Privileged information can be withheld “once sufficient adversity exists” between the board member and the entity, such that the board member “could no longer have a reasonable expectation that he was a client” of counsel to the entity.
The vice chancellor set out three “baskets” of information in this action’s discovery disputes:
(1) documents relating to the firm’s retention and billings;
(2) documents relating to the parties’ performance in a Grain Delivery Contract between Pearl and Adkins that helped Pearl acquire the 56% stock ownership mark and
(3) documents relating to the validity of Pearl’s attempt to place a seventh board representative
Get what you need?
He noted that the current motion is in an expedited proceeding in a summary action, so “the court’s orientation regarding the scope of discovery, typically follows the guidance of two ageless philosophers:” “You can’t always get what you want, but if you try sometimes, you just might find, you get what you need.” Richards, Jagger, You Can’t Always Get What You Want © Abko Music, Inc. (1969).
In this case, regarding item one, that means that retention agreements and law firm Locke Lord LLC’s bills may fit into the “can’t always get” category but Pearl must receive the core issue documents, which fall into the “get what you need” category, the court ruled in denying the motion for those documents and and granting the motion regarding the core issue-related records, he said.
As to item two, he found Pearl clearly waived access to much of the information regarding the GDA pack and has admitted its adverse position regarding the contract, so that part of the motion is denied.
Pearl has standing
Regarding Pearl’s demand on item three for legal documents generated in the Adkins opposition to Pearl’s bid for a seventh board member, the court rejected Adkins’ arguments that Pearl City, as a member, is the only plaintiff in this litigation and it cannot assert a right to Adkins’ privileged information. The vice chancellor denied that part of the motion, finding that on the question of the seventh board member, Pearl City has standing and is just as much the ‘client’ of Locke Lord as Adkins and the general board members are.
He agreed with Pearl City that a Chancery Court decision in Moore Business Forms, Inc. v. Cordant Holdings Corporation directly refutes Locke Lord’s argument that Pearl has no standing in that matter. Moore Business Forms, Inc. v. Cordant Holdings Corporation 1996 WL 307444 (Del. Ch. June 4, 1996).
“Nothing in the LLC’s operating agreement would restrict the Pearl City’s board members’ right to access privileged information from Adkins’ counsel; there are no Related Transactions involved in Pearl City’s attempts to acquire additional Adkins units or in its effort to assert control over the Board,” the court said.
That leaves adversity as the only basis on which Locke Lord can prevent Pearl City from accessing the privileged information Pearl City seeks with respect to the control dispute, the vice chancellor said. He disagreed with Locke Lord’s argument that this case is different from the typical control dispute because Pearl City’s unit acquisitions threaten Adkins’ qualification to continue to be taxed as a partnership for federal income tax purposes, thereby rendering Pearl City and Adkins adverse.
First, he said, “Locke Lord has not demonstrated, as is its burden as the proponent of the privilege, that Pearl City has a desire to impair Adkins’ federal tax status or otherwise adversely affect the company” and if the law firm has formed an expert opinion that Pearl City is endangering Adkins’ tax status, it should be sharing that advice with all members of the board.
The court said Locke Lord need not produce information on retention and billings or advice given regarding the GDA pact, but it must produce:
(1) all communications and documents concerning the appointment of the seventh board member and private sales of Adkins units between Pearl City and certain general members; and
(2) communications with the general board members concerning the topics identified above as “core issues in dispute.”
Practitioners who deal with this area of law know the outcome of such disputes are often very fact dependent – especially on matters of standing – and they will probably want to compare this ruling with the very different decision by the same jurist in a recently decided Chancery matter in Solar Reserve CSP Hldgs., LLC v. Tonopah Solar Energy, LLC, C.A. No. 2020-0064-JRS opinion issued (Del. Ch. July 24, 2020)(vacated by Order of Delaware Supreme Court on August 9, 2021).
In his Sept. 21 Pearl City ruling, Vice Chancellor Slights said Pearl City had standing and the only question was whether it gave up its right to discovery through waiver or adversity.
In the Solar ruling, in which documents were sought based on a provision in an LLC Agreement, the same jurist found plaintiff Solar Reserve lacked standing from the start because it assigned all claims it had against defendant Tonopah to–what the Court held was–an unaffiliated third party. Under that agreement, that meant Solar Reserve was not the real party in interest and could not maintain that action under Court of Chancery Rule 17(a), because in the Court’s view the assignee had no information rights under the LLC agreement. The Solar ruling was about to be appealed when Tonopah filed for bankruptcy.