|August 8, 2014|
Previously published on August 1, 2014
Over forty years ago, in Garner v. Wofinbarger, 430 F.2d 1039 (5th Cir. 1970), the Fifth Circuit held that, with a showing of good cause, a shareholder investigating potential fiduciary breaches could overcome the attorney-client privilege for internal corporate documents. In Delaware, several Chancery Court decisions had indicated agreement with the Garner doctrine. On July 23, 2014, Garner became the law of Delaware when the Supreme Court adopted the Garner doctrine in Wal-Mart Stores, Inc. v. Indiana Elec. Workers Pension Trust Fund IBEW, No. 614, 2013 (Del. July 23, 2014).
Wal-Mart presents significant concerns regarding the limitations of the attorney-client privilege in shielding in-house privileged communications in the context of shareholder derivative litigation.
The Wal-Mart action originated with a 2012 New York Times article purporting to expose a scheme of illegal bribery payments from Wal-Mart’s Mexican subsidiary, Wal-Mart de Mexico, S.A. de C.V. (“WalMex”), to Mexican government officials between 2002 and 2005, reportedly at the direction of WalMex’s then CEO. According to the article, Wal-Mart’s executives became aware of the scheme in 2005, and - rather than launch a full-scale investigation - conducted a protracted inquiry, headed by the arguably conflicted WalMex general counsel, who summarily concluded that there was no evidence of wrongdoing.
The plaintiff, a Wal-Mart shareholder, brought a books and records action under Title 8, Section 220 of the Delaware Code, which entitles shareholders to review the corporation’s books and records requested for a “proper purpose.” Often times, the shareholder requesting to inspect the corporation’s books and records claims the purpose of the inspection is to investigate mismanagement or other breaches of fiduciary duty.
In Wal-Mart, the plaintiff, by a letter to the company, “requested inspection of broad categories of documents relating to the bribery allegations[.]” Opinion, at 5. Although Wal-Mart made two voluminous productions, including producing “Board and Audit Committee minutes and materials relating to Wal-Mart’s [Foreign Corrupt Practices Act] policy and compliance program,” id., at 6, the plaintiff was dissatisfied with the documents and the company’s heavy redactions. The plaintiff then instituted a Section 220 action in the Delaware Chancery Court. Citing Garner, the court ruled that, in addition to the thousands of documents it had already received, the plaintiff “was entitled to documents protected by the attorney-client privilege.” Id., at 8. On appeal, Wal-Mart argued that the Chancery Court improperly invoked Garner - asserting that the Delaware Supreme Court had never endorsed the doctrine - and in any event misapplied its “good cause” analysis. The Delaware Supreme Court disagreed on both issues, and for the first time expressly adopted the Garner doctrine in affirming the Chancery Court’s ruling.
Garner itself was a ground-breaking decision. In that case, the plaintiffs were shareholders who brought an action against the corporation, along with its officers and directors, in connection with a stock issuance. One defendant, CEO Richard Schweitzer, had been the corporation’s in-house counsel at the time of the issuance. At his deposition, the plaintiffs questioned Schweitzer about legal advice he had given the corporation concerning the issuance, and requested that he produce those communications. The corporation invoked the attorney-client privilege, presenting an issue never before addressed by a federal Circuit Court: the bounds of the attorney-client privilege “where the client asserting the privilege is an entity which in the performance of its functions acts wholly or partly in the interests of others, and those others, or some of them, seek access to the subject matter of the communications.” Garner, at 1101.
The Fifth Circuit acknowledged the competing policy arguments, i.e., the need to protect the attorney-client relationship on the one hand, and the fact that a corporation is beholden to its shareholders on the other. See id. (“[M]anagement is not managing for itself.”). However, the court ruled that the privilege must yield, drawing analogies to the already well-established crime-fraud and joint representation exceptions. It also instituted a “good cause” standard that shareholders must meet, listing relevant factors to consider, such as “the number of shareholders and the percentage of stock they represent; . . . the nature of the shareholders’ claim and whether it is obviously colorable;...the availability of [the information] from other sources; [and] 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[.]” Garner, at 1104.
As explained in Wal-Mart, since Garner, Delaware courts have recognized limitations on the attorney-client privilege in the shareholder-corporation context. It cited two of its previous decisions that implied its approval of Garner in theory, though those decisions were ultimately decided on other grounds. It also noted that the Delaware Chancery Court has, on three occasions, applied Garner in Section 220 actions. With its decision in Wal-Mart, however, the Delaware Supreme Court has officially endorsed the Garner doctrine whenever there is a dispute concerning allegations that the corporation is acting inimical to stockholder interests. “[W]here 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.” Opinion, at 21-22 (quoting Garner).
Wal-Mart reminds lawyers that a corporation’s privileges are fragile. They may be waived on the insistence of a prosecutor; they may one day devolve to an acquiror, a chapter 7 trustee, or, as Wal-Mart teaches, a hostile shareholder. Prudent corporate counsel will keep in mind the possibility of future litigation based on advice given today, and will ensure that the advice is given in good faith, and in service of the corporation’s best interest.