The Delaware Supreme Court recently affirmed the Delaware Chancery Court’s decision to apply the fiduciary exception to the attorney-client privilege in plenary proceedings and Section 220 actions seeking corporate records. While the Delaware Chancery Court has previously applied this doctrine in other cases, including non-Section 220 cases, the Delaware Supreme Court had never explicitly adopted this position until now.
Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust stemmed from the Wal-Mart bribery investigation in Mexico. 95 A.3d 1264, 1267-68 (Del. 2014). After the bribery investigation became public following an article in the New York Times, the Indiana Electrical Workers Pension Trust Fund IBEW (“IBEW”), a Wal-Mart shareholder, sent an inspection request to Wal-Mart, seeking access to corporate documents related to the bribery allegations. Among other things, one of IBEW’s stated purposes for sending the demand letter was to determine if Wal-Mart had breached its fiduciary duties to its shareholders. Id. at 1268-69. Wal-Mart agreed to produce documents but stated it would not produce documents it determined were not necessary or essential to the stated purposes in the demand letter or that were protected by the attorney-client privilege or work product doctrine. Wal-Mart produced its FCPA compliance policies and all board and audit committee meeting minute and materials referencing the bribery allegations. The documents, however, were heavily redacted without explanation, prompting IBEW to file a Section 220 books and records demand with the Delaware Chancery Court. Id. at 1269.
Following oral argument on the demand letter, the Chancery Court ordered Wal-Mart to produce several classes of documents. It also held that IBEW was entitled to documents normally protected by the attorney-client privilege, invoking the fiduciary exception articulated by the Fifth Circuit in Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970). The Delaware Supreme Court upheld this ruling on appeal, holding that this exception is applicable in Section 220 actions. 95 A.3d at 1278.
In Garner, the court issued the following holding regarding the attorney-client privilege and corporations:
The attorney-client privilege still has viability for the corporate client. The corporation is not barred from asserting it merely because those demanding information enjoy the status of stockholders. But where the corporation is in suit against its stockholders on charges of acting inimically to stockholder interests, protection of those interests as well as those of the corporation and of the public require that the availability of the privilege be subject to the right of the stockholders to show cause why it should not be invoked in the particular instance.
Id. at 1103-04.
In other words, stockholders of a corporation can invade the attorney-client privilege to prove fiduciary breaches by those in control of the corporation upon a showing of good cause. The Garner court then listed the following factors that should be considered when evaluating whether “good cause” has been shown:
- the number of shareholders and the percentage of stock they represent;
- the bona fides of the shareholders;
- the nature of the shareholders’ claim and whether it is obviously colorable;
- the apparent necessity or desirability of the shareholders having the information and the availability of it from other sources;
- whether, if the shareholders’ claim is of wrongful action by the corporation, it is of action criminal, or illegal but not criminal, or of doubtful legality;
- whether the communication related to past or to prospective actions;
- whether the communication is of advice concerning the litigation itself;
- the extent to which the communication is identified versus the extent to which the shareholders are blindly fishing; and
- the risk of revelation of trade secrets or other information in whose confidentiality the corporation has an interest for independent reasons.
Id. at 1104.
In Wal-Mart, the Delaware Supreme Court held that this reasoning should be applied in both plenary stockholder/corporation proceedings and in Section 220 actions. 95 A.3d at 1277-78. For Section 220 actions, the court held that the “necessary and essential” inquiry into the records demand must precede the privilege inquiry “because the necessary and essential inquiry is dispositive of the threshold question – the scope of document production to which the plaintiff is entitled under Section 220.” Id. at 1278.
The court also held that the Chancery Court had properly applied the fiduciary exception to IBEW’s requests, and concluded that the documents sought were necessary and essential to seeking information about the bribery allegations in Mexico and whether the company had covered them up. The privileged documents sought by IBEW went to those issues. The documents showed that the legal department did not think a business division under investigation should be allowed to conduct the investigation and that there were serious problems within the Mexican division that were not being addressed. 95 A.3d at 1278-79. It dismissed Wal-Mart’s claim that the Chancery Court improperly conflated the “necessary and essential” standard of Section 220 with the “good cause” standard of Garner. The court found that the Chancery Court had first made the predicate Section 220 finding that the privileged information was necessary and essential before it concluded there was good cause to produce the documents under the Garner standard. Id. at 1279-80. The court also agreed with the Chancery Court that several of the “good cause” factors favored IBEW: the information was likely not available from non-privileged sources; there was no risk of revealing trade secrets; the allegations implicated criminal conduct under the FCPA; IBEW is a legitimate shareholder; and it was not conducting a fishing expedition with its document requests. Id. at 1280.
The court also upheld the Chancery Court’s application of the Garner factors to documents normally protected by the work-product doctrine. The court found that the Garner factors overlapped with the required showing under the Rule 26(b)(3) work product doctrine. The court noted that previous Chancery Court decisions had also recognized this overlap. Id. at 1280-81.
Before the Wal-Mart decision, there were a number of decisions by the Delaware Chancery Court that allowed the fiduciary exception to the attorney-client privilege in various types of shareholder and partnership cases. The Delaware Supreme Court’s decision now means there is no question under Delaware law that shareholders seeking corporate records in Section 220 may invoke the fiduciary exception in records demand cases when they can show good cause.