To fulfill their fiduciary duties to oversee and properly manage a corporation governed by the Delaware General Corporation Law (DGCL), directors have broad rights to the company’s privileged and confidential information. Delaware courts have explained that directors are treated as joint clients with the company, and thus, share the company’s privilege to legal advice provided to the company through its officers or directors, including if necessary to perform their fiduciary duties, privileged communications that occurred before such directors joined the board.
In turn, under a long line of Delaware cases dating back to 1992, a director may share a corporation’s privileged communications with the stockholder designating the director to the board under certain limited circumstances: first, when a stockholder has the right to designate a director to the board by contract or its stockholder voting power; or second, when a director serves as a controller or fiduciary of the stockholder. Delaware courts have reasoned that when a director serves as the stockholder’s designee to the board, that director acts as the stockholder’s representative to the board, and the stockholder is therefore, generally entitled to the same privileged or confidential information of the company as the director. If the director serves as a controller or fiduciary of the stockholder, Delaware courts reason that it is unrealistic and impractical that company information shared with the director could be segregated from the director’s thought process in fulfilling their dual-fiduciary duties to both the company and the stockholder. This rationale has been described as the “one-brain” theory because the director is unable to split his or her brain between the dual-fiduciary duties owed as a director of the company and as a fiduciary or controller of the stockholder. But even if the director is entitled to share the company’s privileged or confidential information with a designating stockholder, that entitlement does not give the stockholder the freedom or unfettered right to further disclose or use the information in whatever manner the stockholder sees fit.
In the court’s recent decision, Icahn Partners v. Francis deSouza, C.A. No. 2023-1045-PAF (Del. Ch. January 16, 2024), the plaintiff Icahn stockholders sought to use privileged and confidential information shared with them by their designated director in a complaint, asserting direct and derivative fiduciary claims against other directors. The Icahn stockholders asserted that the combination of their having nominated the director, who was subsequently elected to the company’s board, and his employment relationship with an entity affiliated with the Icahn stockholders negated any reasonable expectation that the director could not share the company’s privileged or confidential information with the Icahn stockholders.
The Court of Chancery held that this director nomination and employment combination did not satisfy the court’s legal test for a director to share the company’s privileged or confidential information with the Icahn stockholders. First, the Icahn stockholders did not have a contractual right under the company’s documents to appoint a director to the board, and owning less than two percent of the company’s outstanding stock, they did not control the stockholder vote in their director’s election. Hence, the Icahn stockholders were not generally entitled to the same privileged or confidential information of the company as the director. Second, because the director did not control the Icahn stockholders, and did not serve as a fiduciary of the Icahn stockholders, the dual-fiduciary concern was not implicated. The court distinguished the director’s employment relationship with the Icahn stockholders from the “one brain” dual-fiduciary case, where the director is unable to split his or her brain between the dual-fiduciary duties owed as a director of the company and as a fiduciary or controller of the stockholder. Indeed, the Icahn stockholders did not argue that the director’s employment relationship with an affiliated entity of the Icahn stockholders gave rise to a fiduciary relationship or influence over any of the Icahn stockholders. Moreover, any fiduciary duty arising from a director’s employment relationship with a third-party does not take precedence over the fiduciary duties that a director owes to a company.
In sum, the court concluded that the director was not entitled to share any privileged or confidential information of the company with the Icahn stockholders. Accordingly, as a remedy, the court struck the privileged or confidential information alleged by the Icahn stockholders in their complaint. In striking these allegations under Court of Chancery Rule 12(f), the court referenced the words of former Chief Justice Leo Strine that “‘if you have someone else’s stuff and you shouldn’t have that, then you [have] got to give it back’ and may not use it for any purpose.”