Andrew Ralli of the Delaware office of Lewis Brisbois prepared this post.
The Court of Chancery recently granted a motion to strike portions of a complaint derived from privileged or confidential board-level communications in Icahn Partners LP, et al. v. Francis deSouza, et al., C.A. No. 2023-1045-PAF (Del. Ch. Jan. 16, 2024).
Illumina is a biotech company that develops tools and systems for genetic analysis. In April 2023, three Illumina stockholder—collectively owing approximately 1.4% of the Company’s outstanding common stock and under the control of Carl Icahn—proposed a three-candidate slate to challenge the Company’s nominees at the 2023 annual meeting of stockholders. Andrew Teno, one of Plaintiffs’ nominees and an employee of another Icahn-controlled entity, Icahn Capital LP (“Icahn Capital”), was elected to the Company’s Board. Teno subsequently provided privileged and confidential information to Icahn and his affiliates, including information that predated his tenure on the Board.
In October 2023, several months after Teno joined the Board, the same three Illumina stockholders filed a derivative lawsuit claiming Illumina’s Board caused the Company to break the law by voting in favor of the troubled $8 billion reacquisition of Grail, Inc. (“Grail”), which resulted in a $476 million fine by the European Union and barred Illumina from acquiring Grail.
Shortly thereafter, the Company filed a motion to strike paragraphs of the complaint that contain information that Teno obtained and supplied to the Plaintiffs after joining the Company’s Board.
Highlights of the Case
The motion before the court did not involve a dispute over Teno’s entitlement to Illumina information that was protected by the attorney-client privilege. Rather, “[t]he issue is whether Teno is permitted to share that privileged information with the Plaintiffs and whether Plaintiffs may disclose that confidential information in a civil complaint against the Company’s directors.”
Vice Chancellor Fioravanti acknowledged the Court “has not developed a bright-line rule” regarding directors’ sharing of privileged information with the stockholders who nominated them. After providing a “brief recap of the key precedents . . . to set the stage[,]” the Court recognized that it “has held in a long line of cases dating back to 1992 that a director may share a corporation’s privileged communications with the director’s designating stockholder under certain limited circumstances.” A director’s sharing information with the designating stockholder, however, “does not give the stockholder freedom to further disseminate the company’s confidential information.” Under Delaware law, a director may share privileged or confidential company information with a stockholder when the director is either:
(A) designated to the board by the stockholder (known as “designated-director” matters) pursuant to:
(i) a contract; or
(ii) the stockholder’s voting power, i.e., a controlling stockholder.
(B) serves in a controlling or fiduciary capacity with the stockholder (known as “one-brain” or “dual-fiduciary” matters).
Vice Chancellor Fioravanti found that “[t]he facts of this case do not fit the paradigm of the cases discussed above.” First, the Plaintiffs did “not have a contractual right to appoint a director and, owning less than two percent of Illumina’s outstanding stock, they did not control the vote during Teno’s election.” In fact, “as an undisputed factual matter, Plaintiffs did not designate Teno to the Company’s [Board] pursuant to the type of contractual right present in any of the designated-director cases.” For instance, recently in Hyde Park Venture P’rs Fund III, L.P. v. FairXchange, LLC, 292 A.3d 178 (Del. Ch. 2023), two venture capital funds that owned preferred stock in FairXchange, Inc. had a contractual right to designate a director to the FairX board of directors.
In contrast, Teno, in connection with his joining the Board, agreed to abide by the Company’s Code of Conduct, which provides, inter alia, that, “‘[e]xcept as required for the proper performance of your duties, you may not use or give to others trade secrets or confidential information of the Company.’”
Second, “Plaintiffs’ contention that their relationship with Teno grants them access to Illumina’s privileged information lacks support under either recognized path of acceptable information sharing.” As the Court noted, for instance, “[i]n the ‘one brain’ cases, the director controlled or served in a fiduciary capacity with the stockholder seeking the information and, therefore, was unable to split their brain between their position as a director and their position controlling or as a fiduciary to the entity seeking information.” Here, Teno’s employment relationship with Plaintiffs is readily distinguishable from the ‘one brain’ cases. Teno did not serve in a fiduciary role for any of the Plaintiffs, nor did Plaintiffs argue that Teno exercises influence over any of them. In fact, Teno is not an employee of any of the Plaintiffs. Rather, he is an employee of Icahn Capital, which, like the Plaintiffs, is also controlled by Icahn.
Additionally, the Court rejected Plaintiffs’ implicit argument suggesting that Hyde Park expanded the circumstances under which a director could share confidential and privileged information with stockholders:
“Hyde Park did not change the law; it reframed and clarified a ‘framework [that] has been settled law in Delaware for nearly four decades.’ . . . [T]he mere fact that Teno was nominated by the Plaintiffs and is an employee of another Icahn-affiliated entity does not persuade the court that Teno had the right to disclose Illumina’s confidential and privileged information to the Plaintiffs.”
. . .
The Court also rejected Plaintiffs’ argument “that there is no harm” because the complaint was filed confidentially and not available to the public:
“The purpose of the motion to strike is to prevent Plaintiffs from utilizing privileged information to which they are not entitled. The fact that the public is not able to access that information does not remedy Teno’s unauthorized dissemination of Illumina’s privileged and confidential information or Plaintiffs’ unauthorized use of it.”
The Court recognized the Challenged Information did “not neatly fit into the four categories that permit the court to strike information from a pleading under Rule 12(f).” Nevertheless, the Court used its broad equitable powers “to protect confidential information and to formulate an appropriate remedy in the event confidential or privileged information is improperly interjected into litigation.” The Court granted the motion and required all references to challenged information be stricken from the complaint.
On January 23, 2024, however, the Plaintiffs filed a motion for reargument, claiming that the Opinion “overlooked or misapprehended facts . . . that met both standards” under which a director may share privileged or confidential company information with a stockholder. The results of that motion–not available as of this writing–should be included in a complete analysis of this case.