Attorney-Client Privilege May Not Shield Documents Requested By Shareholders Under Delaware Law
Peter J. Gallagher
By: Peter J. Gallagher
The Delaware Supreme Court recently issued a decision in Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust Fund, in which it required Wal-Mart to produce certain attorney-client communications requested by one of its shareholders. Importantly, this ruling did not come during discovery in a derivative lawsuit but was instead made pursuant to an interesting aspect of Delaware law that allows shareholders to inspect a corporation’s books and records as part of its investigation of a potential claim or for any other “proper purpose.” In affirming the Chancery Court’s order compelling the production of these documents, the Delaware Supreme Court adopted a not-universally-accepted fiduciary exception to the attorney-client privilege, which is a development about which any corporation organized under Delaware law should be aware.
Section 220 of the Delaware General Corporation Law allows stockholders to inspect, upon request, a corporation’s books and records “for any proper purpose.” A “proper purpose” can include an investigation by a stockholder into suspected corporate wrongdoing, but only if the stockholder first shows, by a preponderance of the evidence, that a credible basis exists for the stockholder’s suspicion. Moreover, stockholders must demonstrate that the scope of production is “necessary and essential” to the proper purpose – i.e., that the documents address the “crux of the shareholder’s purpose” and are “unavailable from another source.” Because it is such a potentially powerful investigatory tool for stockholders contemplating lawsuits against corporations, “Section 220 hearings” -- where a stockholder must demonstrate the propriety and reasonableness of its demand -- are often hotly contested.
Wal-Mart involved one such hearing. In that case, the Indiana Electrical Workers Pension Trust Fund IBEW (the “Fund”), a pension fund and Wal-Mart stockholder, demanded documents from Wal-Mart related to allegations of bribery by Wal-Mart’s Mexican subsidiary. The request was inspired by a New York Times article entitled: “Vast Mexico Bribery Case Hushed by Wal-Mart After Top-Level Struggle.” The Fund requested the documents as part of its investigation into whether Wal-Mart had mismanaged the crisis, whether any executives at Wal-Mart or its subsidiary had breached any of their fiduciary duties, and whether a pre-suit demand on the board would be futile as part of a derivative suit.
Wal-Mart produced documents in response to the Fund’s demand, but the Fund claimed the response was inadequate and filed a complaint under Section 220 seeking additional documents along with unredacted copies of certain documents that Wal-Mart had already produced. Although Wal-Mart made two supplemental productions following the filing of the complaint, the Fund still claimed that the response was inadequate. Accordingly, the Chancery Court conducted a trial (on the paper record) to determine whether Wal-Mart had produced all documents responsive to the Fund’s demand.
After hearing oral argument, the Chancery Court ordered that Wal-Mart produce several categories of documents that it had previously withheld, including documents withheld under the attorney-client privilege and the work-product doctrine. In doing so, the Chancery Court adopted the exception to the attorney-client privilege articulated in Garner v. Wolfinberger, 430 F.2d 1093 (5th Cir. 1970). The “Garner Doctrine,” as it is commonly known, allows stockholders, upon a showing of good cause, to compel the production of documents otherwise protected by the attorney-client privilege. As the Delaware Supreme Court observed in Wal-Mart, the Garner Doctrine “allows stockholders of a corporation to invade the corporation’s attorney-client privilege in order to prove fiduciary breaches by those in control of the corporation upon showing good cause.” Among the factors court will consider when deciding whether good cause exists are: whether the stockholders have an obviously colorable claim; the necessity of the information requested and the availability of it from other, non-privileged sources; the extent to which the attorney-client communications are identified versus the extent to which the shareholders are “blindly fishing;” and the risk of revelation of trade secrets or other confidential information. In Wal-Mart, the Chancery Court held that the Fund satisfied each of these factors.
On appeal, Wal-Mart argued that the Chancery Court erred by applying the Garner Doctrine in the first place. Specifically, it argued: (1) the Garner Doctrine had never been adopted by the Delaware Supreme Court, therefore its “availability . . . to litigants in Delaware [was] an open question; and (2) regardless of whether the Garner Doctrine was available to litigants in plenary proceedings, it should not be available to stockholders in a Section 220 hearing. The Supreme Court rejected both claims.
The Supreme Court noted that, while it had never expressly adopted the Garner Doctrine, several Chancery Court opinions had done so in the context of Section 220 books and record actions. More importantly, however, the Supreme Court held that the Garner Doctrine should be adopted because it was “narrow, exacting, and intended to be very difficult to satisfy,” and therefore “achieve[d] a proper balance” between the “legitimate competing interests” of allowing public access to important documents and protecting the sanctity of attorney-client interactions. For that reason, the Supreme Court held that it should apply to “plenary stockholder/corporation proceedings” and to Section 220 actions. But, the Supreme Court cautioned that, in a Section 220 proceeding, the “necessary and essential inquiry must precede any privilege inquiry because [that] inquiry is dispositive of the threshold question – the scope of document production to which plaintiff is entitled under Section 220.” In other words, before even applying the Garner Doctrine, a court must determine that the documents requested are necessary and essential to the requesting shareholder’s proper purpose.
In Wal-Mart, the Supreme Court affirmed the Chancery Court’s conclusion that the attorney-client information requested by the Fund were necessary and essential because there was already evidence in the record that Wal-Mart’s legal staff was involved in the underlying bribery scandal and the corporation’s allegedly improper response to it – e.g., documents related to internal audits by the legal team, communications expressing concerns about entrusting an investigation to members of the legal department who were (or should have been) subjects of the investigation, etc. The Supreme Court also affirmed the Chancery Court’s application of the Garner Doctrine to the underlying facts, and its conclusion that the Fund had shown good cause to compel the production of the attorney-client documents. Among other things, the Chancery Court held that good cause existed because: the Fund had demonstrated a colorable claim of misconduct; the information the Fund sought was unavailable through other, non-privileged sources; the documents were specifically identified, rather than being part of a “fishing expedition” on the part of the Fund; the documents did not relate to the defense of any potential derivative action but instead dealt with the underlying conduct that the Fund was investigating; and there was no risk that producing the documents would reveal trade secrets or other confidential information.
The Delaware Supreme Court also affirmed the Chancery Court’s decision to compel the production of documents withheld under the work-product doctrine. The Garner Doctrine does not apply to information protected by the work-product doctrine. However, Court of Chancery Rule 26(b)(3) requires the production of non-opinion work product “upon a showing that the party seeking discovery has substantial need of the materials . . . and that the party is unable without due hardship to obtain the substantial equivalent of the materials by other means.” As a result, there is significant overlap between the “good cause” standard under the Garner Doctrine and the standard to be applied to the production of alleged work-product under Delaware’s court rules. In light of this overlap, the Delaware Supreme Court Supreme affirmed the Chancery Court’s holding that the Fund had demonstrated its entitlement to documents identified by Wal-Mart as work-product.
This is an important decision for corporations, particularly those organized under Delaware law. While the Garner Doctrine has not been adopted in all jurisdictions -- and has, in fact, been criticized and rejected by some courts -- it is now the law in Delaware and corporations should be aware of it as they respond to potential crises and respond to the resulting Section 220 demands from shareholders.
Peter Gallagher is counsel to Porzio, Bromberg & Newman, P.C. He concentrates his practice in commercial litigation, business disputes, and counseling. Peter can be reached at 973-889-4147 or firstname.lastname@example.org.