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Delaware Supreme Court Adopts Exception to Attorney-Client Privilege

August 13, 2014
Albert H. Manwaring, IV
Delaware Business Court Insider

In Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970), the U.S. Court of Appeals for the Fifth Circuit recognized a fiduciary exception to the attorney-client privilege "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." Thus, upon a showing of "good cause," Garner allows stockholders to invade the corporation's attorney-client privilege to prove fiduciary-duty breaches of directors, officers or those in control of the corporation. The Fifth Circuit listed the following factors relevant to show "good cause" under the Garner exception to the attorney-client privilege: "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 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; the risk of revelation of trade secrets or other information in whose confidentiality the corporation has an interest for independent reasons."

The Supreme Court of Delaware has twice "tacitly endorsed, in dicta," the Garner exception to the attorney-client privilege. First, in Zirn v. VLI, 621 A.2d 773, 781 (Del. 1993), the Supreme Court recognized that the attorney-client privilege is "not absolute and, if the legal advice relates to a matter which becomes the subject of a suit by a shareholder against the corporation, the invocation of privilege may be restricted or denied entirely." Second, in Espinoza v. Hewlett-Packard, 32 A.3d 365, 374 (Del. 2011), the Supreme Court was presented with an issue under the Garner doctrine in a Delaware General Corporation Law Section 220 action, but did not reach the issue, because the "necessary and essential" inquiry to determine the proper scope of the inspection in a Section 220 action "logically precede[d] [as a predicate question] any privilege or work-product inquiry." The Delaware Court of Chancery has adopted the Garner doctrine as a valid exception to the attorney-client privilege in at least three Section 220 actions. In its recent decision,Wal-Mart Stores v. Indiana Electrical Workers Pension Trust Fund IBEW, No. 614, 2013 (Del. July 23, 2014) (Holland, J.), the Supreme Court of Delaware expressly adopted the Garner doctrine exception to the attorney-client privilege in both plenary stockholder actions and books-and-records actions under DGCL Section 220. In Wal-Mart Stores, the Supreme Court found "good cause" to apply the Garner exception to the attorney-client privilege in the Section 220 action because essential information to the stockholder's proper purpose, which concerned how Wal-Mart's counsel and its business unit accused in the alleged bribery scandal conducted the investigation of its own alleged bribes, was not available from nonprivileged sources.

Background

A stockholder brought a DGCL Section 220 action in the Delaware Court of Chancery seeking to inspect records related to Wal-Mart's alleged bribery scandal involving its Mexican subsidiary. The purposes of the Section 220 demand were to investigate the handling of the investigation of the alleged bribery scandal, whether a cover-up took place, and what details were shared with Wal-Mart's board. Thus, the Section 220 demand sought to investigate the possibility of breaches of fiduciary duty in connection with the bribery allegations, and whether pre-suit demand on the board would be futile in a subsequent derivative suit. The Court of Chancery found "good cause" existed to invade Wal-Mart's attorney-client privilege under the Garner exception, and ordered the company to produce documents protected by the attorney-client privilege. Similarly, for reasons that overlapped its "good cause" ruling, the Court of Chancery also found a "substantial need" that entitled the stockholder to documents protected by the work-product doctrine. Wal-Mart appealed the Court of Chancery's decision to the Supreme Court of Delaware.

Garner Doctrine

The Supreme Court held that the Garner exception to the attorney-client privilege is applicable in both plenary stockholder/corporation proceedings and Section 220 books-and-records actions. In a Section 220 action, the Supreme Court ruled that the "necessary and essential" inquiry must precede any privilege inquiry or exception under the Garnerdoctrine because the "necessary and essential" inquiry is a threshold question to determine the scope of the inspection to which a stockholder is entitled under Section 220. In recognizing the "critical" function of the attorney-client privilege to encourage full and frank communications between counsel and their clients in the administration of justice, the Supreme Court emphasized that the Garner exception to the attorney-client privilege was "narrow, exacting, and intended to be very difficult to satisfy."

The Supreme Court concluded that the Court of Chancery had properly applied the Garner exception to permit the stockholder to inspect documents protected by the attorney-client privilege of Wal-Mart. First, the Supreme Court found that the stockholder was seeking privileged documents that were "necessary and essential" to its Section 220 purposes to investigate the handling of the investigation of the alleged bribery scandal, whether a cover-up took place, and what details were shared with Wal-Mart's board. After finding that the privileged documents met the "necessary and essential" inquiry in the Section 220 action, the Supreme Court examined the Court of Chancery's consideration of the factors relevant to show "good cause" to invade the privilege under the Garner exception. First, the Supreme Court found a "colorable claim" existed based on Wal-Mart's own admissions that it had real concerns with what happened in Mexico concerning the alleged bribery scandal. Second, the Supreme Court found that essential information to the stockholder's proper purposes was not available from nonprivileged sources. The Supreme Court reasoned that there were no nonprivileged sources of information available that would show how Wal-Mart's counsel and its business unit accused in the alleged bribery scandal conducted the investigation of its own alleged bribes. Next, the Supreme Court noted that the privileged information sought by the stockholder was particularized, not just a broad fishing expedition, and was not advice about the Section 220 action itself, but rather real-time advice regarding how Wal-Mart conducted the investigation of the bribery allegations. Finally, the Supreme Court found that the disclosure of the privileged information would not reveal Wal-Mart's trade secrets, that the bribery allegations implicated criminal conduct under the Foreign Corrupt Practices Act, and that the stockholder was a legitimate stockholder as a pension fund in Wal-Mart.

In sum, the Supreme Court found "good cause" existed to invade Wal-Mart's attorney-client privilege under the Garner exception, and affirmed the Court of Chancery's order for Wal-Mart to produce documents protected by the attorney-client privilege. Similarly, the Supreme Court held that the Court of Chancery's reliance upon reasons that overlapped its "good cause" ruling to support its finding of an exception to the work-product doctrine was appropriate. The Supreme Court reasoned that the factors relevant to "good cause" under the Garner exception to the attorney-client privilege, i.e., necessity of the shareholders to have the information and availability of such information from other sources, overlapped the "substantial need" test to overcome the work-product doctrine under Court of Chancery Rule 26(b)(3). Accordingly, the Supreme Court also affirmed the Court of Chancery's order for Wal-Mart to produce documents protected by the work-product doctrine.

Lessons Learned

The Supreme Court may uphold the application of the Garner exception to the attorney-client privilege when necessary and essential information to a stockholder's proper purpose for the Section 220 investigation is not available from nonprivileged sources, and for the same reason, may uphold the application of an exception to the work-product doctrine.

Delaware Business Court Insider  |  August 13, 2014