In the recent decision in Salberg v. Genworth Financial,the Delaware Court of Chancery declined to compel the production of attorney-client privileged documents in a books-and-records action. In Salberg, Vice Chancellor Joseph R. Slights III was confronted with an unusual set of facts which culminated with a trial on the narrow issue of whether Genworth would be required to produce otherwise attorney-client privileged information under the Garner fiduciary exception. The court held that despite most of the factors in the Garner analysis being favorable to the plaintiffs' position, those factors were not all-inclusive nor dispositive in every case. Ultimately, the court held that the plaintiffs failed to demonstrate the "good cause" necessary to satisfy the Garner test.
The plaintiffs in Salberg were stockholders of Genworth and, almost a year prior to making their Section 220 demand, commenced a derivative action asserting breaches of fiduciary duties against Genworth directors and officers in the Court of Chancery. By late 2016, the parties in the derivative action were submitting briefs related to the defendants' motion to dismiss the complaint. However, before the motion to dismiss was resolved by the court, Genworth announced that it would be acquired by a Chinese company in an all-cash transaction. Following the announcement of the impending sale of Genworth, plaintiffs made their Section 220 demand upon Genworth, seeking books and records that would allow them to investigate if and how the directors valued the pending derivative claims in connection with the proposed merger. After a series of meet-and-confer sessions, Genworth produced a total of approximately 700 pages of documents. However, many of the documents were heavily redacted based on assertions of attorney-client privilege. After being unable to resolve their dispute over Genworth's redacted production, plaintiffs filed a Section 220 complaint in January.
The single issue presented to the court for disposition at trial was whether the Garner fiduciary exception should preclude Genworth from redacting the produced documents for attorney-client privilege. Delaware's Supreme Court has adopted the Garner fiduciary exception in both plenary and Section 220 actions. The Garner exception recognizes "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 'good cause' why the privilege should not apply." Nevertheless, the Garner exception is intended to be a narrow, exacting and difficult standard to satisfy. In its decision, the court noted the nine factors set forth in Garner to consider and balance when determining whether the plaintiff has demonstrated the existence of "good cause." Delaware courts have identified three of the Garner factors which bear "particular significance." Those factors are: the colorability of the claim; the extent to which the communication is identified versus the extent to which the shareholders are blindly fishing; and the apparent necessity or desirability of shareholders having the information and availability of it from other sources. In addition to those three factors, the parties in Salberg focused on "whether the communication is of advice concerning the litigation itself."
In its analysis, the court held that plaintiffs had stated a colorable claim for breach of fiduciary duty relating to Genworth's board's evaluation of the pending derivative claims during the negotiation of the merger. Insofar as this was a Section 220 action, the plaintiffs were only required to demonstrate that a "credible basis" existed to support their claim. As the court states, the "credible basis" standard has been described as the "lowest possible burden of proof," reduced only if there were no requirement that a stockholder present any evidence of wrongdoing. When determining that a credible basis existed for plaintiffs' claims, the court pointed out that Genworth's board ascribed no value to the derivative claims when negotiating the merger. The court also identified serious allegations of systematic fraud levelled against Genworth. Those facts satisfied the court that the plaintiffs had demonstrated that a colorable claim existed under the Garner analysis.
The decisive issue became whether the redacted documents reflected attorney-client privileged advice concerning the litigation itself. The plaintiffs argued that the information did not concern the Section 220 action, rather it concerned the pending derivative action. Genworth, while not explicitly disputing plaintiffs' contention, argued that it would be wholly improper to provide the plaintiffs with attorney-client privileged information relating to a matter that the plaintiffs are presently litigating against Genworth's directors and officers. The information that the plaintiffs would receive in the Section 220 information would be inarguably inaccessible to plaintiffs in the pending derivative action. The redacted documents would most likely contain mental impressions and assessments of defendants and their counsel regarding the pending derivative action, essentially providing plaintiffs with a behind the scenes look at defendants' believed strengths and weaknesses in that litigation. Even with the impending merger that, if closed, would extinguish plaintiffs' derivative standing, the court refused to compel the production of the privileged documents. The court surmised that if the merger closed,the plaintiffs would be able to bring direct claims regarding the consideration received by the stockholders. If the merger did not close, there would not be any need for the demanded information.
In sum, this decision joins Wal-Mart Stores v. Indiana Electric Workers Pension Trust Fund IBEW,Amalgamated Bank v. Yahoo and In re Lululemon Athletica 220 Litigation as critical Court of Chancery opinions regarding the oft-applied Garner fiduciary exception. The fact-intensive analysis employed by the court will surely aid practitioners when assessing requests and responses for books and records.