Delaware Business Litigation Report

Chancery Finds Adversity Between Directors and Formation of Special Committee Shields Against Production of Company-Privileged Information

In re: Howard Midstream Energy Partners, LLC, C.A. No. 2021-0487-LWW (Del. Ch. Sept. 22, 2021)
Issues of corporate privilege among directors entail a fact-specific analysis when a dispute arises among them. Here, the Court of Chancery considered a motion to compel brought by former directors and officers who claimed they were “ambushed” in a corporate “coup.” Because the directors should have considered themselves adverse to the corporation, and because a special committee was formed to deal with the petitioners’ potential separation from the company, the Court denied the petitioners’ motion to compel communications between the other directors and the company withheld as privileged. 

The former-fiduciary claimants argued based on the general rule that a director’s right to access company information is nearly absolute. They claimed that the company could only claim privilege over the separation negotiations leading to their termination, and they filed a motion to compel production of otherwise privileged documents related to all other aspects of the separation, including the events leading up to board meeting at which they were terminated. 

The Court reasoned that Kalisman v. Friedman discussed the exceptions to a director’s presumptive right of “unfettered access.” Those include where sufficient adversity exists between a director and a company such that the director has no reasonable expectation of an attorney-client privileged relationship with company counsel. The petitioners argued for a narrow view of the adversity exception, claiming that while they were adverse with respect to separation negotiations, they were unaware of and so could not have been adverse with respect to the “secret” plans to remove them from the board.

The Court reasoned that, while petitioners were correct that the adversity exception only applies to the subject as to which adversity exists, here it extended beyond mere separation negotiations. A key factor was the petitioners’ designation of certain of their own material as privileged work product, indicating that they anticipated litigation prior to the board meeting at issue. The Court also reasoned that acrimonious negotiations made clear that forced separation was a possibility. The mere fact that the petitioners were unaware of the specific mechanism by which it could occur did not preclude assertion of the privilege by the other directors and the company. Accordingly, the Court denied the petitioners’ motion to compel.

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