I have been writing an ethics column for the national publication of The American Inns of Court, called The Bencher, for about 24 years or so. My latest column appears in the current edition and is reproduced below, courtesy of The Bencher and The American Inns of Court.
Company’s Privileged Communications Must Be Provided to Board Members
By: Francis G.X. Pileggi*
A recent decision from the Delaware Court of Chancery decided an issue of first impression in Delaware: does the management of a Delaware corporation have the authority to unilaterally preclude a director of the corporation from obtaining the corporation’s privileged information? The Chancellor’s answer to the question was: no.
For purposes of this short ethics column, a practice tip for lawyers based on this case would be to remember that, generally speaking, directors and the corporation are joint clients when legal advice is given to the corporation through its directors. This general rule is especially important in the context of a fractured board with competing board factions.
The Court found in the case styled In re WeWork Litigation, No. 2020-0258-AGB (Del. Ch. Aug. 21, 2020), that when management attempted to prevent the entire board from obtaining the company’s privileged data, it had turned on its head a bedrock principle of Delaware corporate law that directors are charged with the duty to manage the company.
The issue arose in the context of dueling special committees of the board of The WeWork Company, and the efforts of one of those committees to seek privileged communications among management of the company. One special committee of the board opposed a motion to dismiss filed by two temporary directors who formed a second special committee. The first committee had filed a complaint against SoftBank Group alleging breach of contract obligations related to the purchase of the company’s stock.
There was no request for communications between the second special committee and its counsel. Rather, the first special committee sought the Company’s privileged communications about how the second special committee was formed and how it may have been influenced by the CEO of SoftBank.
One of the exceptions to the general rule that directors have unfettered access to corporate data is in those situations where “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.” See Kalisman v. Friedman, 2013 WL 1668205 at * 4-5. The Court explained, however, that that exception did not apply based on the facts of the WeWork case.
The Court emphasized that the board, and not management, must make any decision about withholding the company’s privileged data, after analyzing whether the directors had a reasonable expectation that they were clients of the board’s counsel. In the WeWork case, management usurped the role of the board in making that decision.
The Court’s reasoning is based on a “cardinal precept” of Delaware law that the business and affairs of a corporation shall be managed by or under the direction of a board of directors. For that reason, directors must be treated as joint clients when legal advice is rendered to the corporation through one of its officers or directors. By claiming that the directors were precluded from receiving the company’s privileged information, management contravened basic tenets of Delaware law.
When providing counsel to a corporation with a divided board, and access to privileged communications is disputed, a careful lawyer will confirm that management is not the client. Moreover, one should remember that in this context privileged communication may also be subject to review by all members of the board.
*Francis G.X. Pileggi is the managing partner of the Delaware office of Lewis Brisbois Bisgaard & Smith, LLP. His email address is Francis.Pileggi@LewisBrisbois.com. He comments on key corporate and commercial decisions, and legal ethics topics, at www.delawarelitigation.com