This article was prepared by Frank Reynolds, who has been following Delaware corporate law and writing about it in various publications for more than 35 years.
The Delaware Chancery Court recently addressed a novel attorney-client privilege issue in an appraisal action, ruling FairXchange LLC could not shield the merger deal knowledge of its dual-role director/investment funds manager from two plaintiff investor funds because both the funds and the director were in a ‘”circle of confidentiality” in Hyde Park Venture Partners Fund III L.P. et. al. v. FairXchange LLC , C.A. No. 2022-0344-JTL memorandum opinion issued (Del. Ch. Mar. 9, 2023).
In his March 9 memorandum opinion, Vice Chancellor Travis Laster granted the motion of two venture capital investment fund plaintiffs to compel discovery of information about how the FairXchange’s board set the price in a sale of the company to Coinbase Global, Inc. And he denied the company’s bid to force the funds to destroy whatever privileged merger information Weiss may have shared with the fund.
He said the question is ‘whether the Company can invoke the attorney- client privilege against the funds to withhold documents that they otherwise would be required to produce.’ The answer is “No,” he said, and set out the reasons why this case is not an exception to that confidentiality rule.
Corporate counsel could profit from reading the vice chancellor’s review of those exceptions and the opinions he cited as the foundation for that March 9 decision. “Since 1992, Delaware law has recognized that when a director represents an investor, there is an implicit expectation that the director can share information with the investor,” he noted.
Ira Weiss was one of three directors on the Fairxchange board when Coinbase made an acquisition offer that split the board: Weiss wanted to look at other options but the other two sought to move ahead with the Coinbase deal and resented Weiss’ opposition so much that they allegedly shut Weiss out of further sale negotiations and induced their preferred shareholder allies to remove him from the board.
When the sale was completed, investors Hyde Park Venture Partners Fund III L.P. and Hyde Park Venture Partners Fund III Affiliates LP filed an appraisal action claiming they did not get fair value for their shares. In discovery battles, FairXchange tried to force the funds to destroy information given Weiss as a director–even though he was the funds’ manager and a partner in their parent venture capital firm.
Exceptions not applicable
The court listed three recognized methods by which a corporation can alter that default rule, but said none of them were in effect here because FairXchange did not act to preserve privilege:
First, as frequently happens, the parties can address the matter by contract, such as through a confidentiality agreement.
Second, the board of directors can form a committee that excludes the director, at which point the committee can retain and consult confidentially with counsel.
Third, once a sufficient adversity of interests has arisen and becomes known to the director, the director cannot reasonably rely on corporate counsel as to the matters where the interests of the director and corporation are adverse.
Access to info foremost
The vice chancellor said, “A director’s ability to access corporate information affects whether a corporation can claim that a communication was confidential as to the director and thereby invoke the attorney-client privilege. A director’s right to information is “essentially unfettered in nature,” and that right includes access to privileged material. He said, “Directors of Delaware corporations are generally entitled to share in legal advice the corporation receives.” In re WeWork Litig., C.A. No. 2022-0344-JTL, 250 A.3d 901, 908 (Del. Ch. 2020).
“Under the joint client approach, the director starts inside the circle of confidentiality. Without the expectation of confidentiality on which privilege depends, the corporation cannot invoke the privilege against the director,” the vice chancellor ruled.
The Funds’ motion to compel was granted. “The Company cannot invoke the attorney-client privilege to withhold materials created between November 14, 2019, and December 8, 2021, except that the Company can assert the attorney-client privilege regarding communications relating to Weiss’s books-and-records request after he sent it on December 7.” The Company’s request for a destruction order was denied.