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Court Of Chancery Protects Privilege In Books and Records Action And Addresses Corwin’s Effect On Mismanagement Investigation Claims

Salberg v. Genworth Financial Inc., C.A. No. 2017-0018-JRS (July 27, 2017)

This is an important decision for its analyses implicating the Garner and Corwin rules.  The Garner rule is that, under certain narrow circumstances where the plaintiff establishes good cause, the attorney-client privilege will be unavailable to corporate fiduciaries who are defending against claims brought by the stockholders who are the object of their fiduciary duties.  Here, the Court of Chancery declined to invoke the Garner rule and protected the attorney-client privilege in a books and records case where the same stockholders were already pursuing derivative litigation against the company on the same subject as the records demand but could not gain access under Garner in that earlier litigation.

In addition, the typical standard for assessing whether a books and records plaintiff has stated a proper purpose of investigating mismanagement is whether the plaintiff’s allegations establish a credible basis for suspecting mismanagement.  Outside the books and records context, under the Corwin rule, stockholder approval of a transaction will extinguish fiduciary duty claims under the right circumstances.  Here, the Court declined to assess a Corwin-based defense (where the merger had yet to close), choosing instead to apply the time-honored credible basis test.