In a matter of first impression, the Delaware Court of Chancery ruled that management of a Delaware corporation may not preclude a director from obtaining privileged information of the company. The decision was handed down yesterday by Chancellor Bouchard in the ongoing WeWork litigation, styled as In re WeWork Litigation, C.A. No. 2020-0258-AGB (Del. Ch. Aug. 21, 2020).
The procedural history of this action is worth noting. The lawsuit was filed by The We Company (“Company”) in April 2020, at the direction of its Special Committee, against SoftBank Group Corp. and SoftBank Vision Fund (AIV M1) L.P., alleging that defendants breached contractual obligations owed to the Company to use reasonable best efforts to purchase up to $3 billion of the Company’s stock in a tender offer.
A new committee of the Company’s board of directors consisting of two temporary directors was then formed on May 29, 2020 (the “New Committee”), after the putative controlling stockholder of the Company and SoftBank asked the Company’s board to confirm that the Special Committee did not have authority to bring the litigation on behalf of the Company. Under the direction of the New Committee, the company then brought a motion under Court of Chancery Rule 41(a) for leave to voluntarily dismiss the complaint filed in the action.
In response, the Special Committee sought access to the Company’s privileged information relating to the circumstances under which the New Committee was established and how it may have been influenced by the Company’s management (“Management”), the Chief Executive Officer of which was chosen by SoftBank. The Special Committee does not seek privileged information between the New Committee and its counsel.
In opposing the requested discovery, Management referred the Court to competing letters written to the board regarding the SoftBank contract litigation, which, according to Management, demonstrated that the special committee had shown “adversity” to the Company, and should thus be blocked from viewing these privileged communications.
In its analysis, the Court noted that although “a director’s right to information is essentially unfettered in nature”, there are “three recognized limitations on a director’s ability to access privileged information”:
- The existence of an ex ante agreement among the contracting parties;
- A board may appoint a special committee, which would be free to retain separate counsel, and communications with separate counsel would be protected as necessary for the special committee to conduct its ongoing work; or
- To the extent there is sufficient adversity between a director and the corporation “such that the director would no longer have a reasonable expectation that he was a client of the board’s counsel.”
Slip op. at 15-16 (quoting Kalisman v. Friedman, 2013 WL 1668205, at *4-*5 (Del. Ch.).
The Court disagreed, stating that the letters reflect a dispute between the Special Committee and SoftBank, both of which contend that the other is motivated by self-interest, and not a dispute between the Special Committee and the Company.
Chancellor Bouchard then turned to the more fundamental question raised by the dispute: whether or not adversity exists, “does management have the authority to unilaterally preclude a director of the corporation from obtaining the corporation’s
privileged information?” Slip op. at 18.
The Court found that management did not have such authority. The Court stated that “[i]t is a “cardinal precept” of Delaware law that “the business and affairs of a corporation . . . shall be managed by or under the direction of a board of directors . . . .”, and that, “[i]n claiming the right to shield Company privileged information from the entire Board, Management turns these bedrock principles of Delaware law on their head.” Id. at 19 (citations omitted).
As stated by Chancellor Bouchard:
To summarize, this decision holds, under basic principles of Delaware law, that directors of a Delaware corporation are presumptively entitled to obtain the corporation’s privileged information as a joint client of the corporation and any curtailment of that right cannot be imposed unilaterally by corporate management untethered from the oversight and ultimate authority of the corporation’s board of directors.
As such, Chancellor Bouchard held that the Special Committee was entitled to receive the privileged documentation of the Company that it had requested.
This decision holds, as a matter of first impression, that management of a Delaware corporation (as compared to the board) lacks authority to unilaterally deprive the board of privileged communications of the corporation, while reiterating familiar notions that a board oversees management, and a director’s right to corporate information, including privileged information, is very broad in scope. This decision is an important read for any litigant or counsel involved in disputes over privilege between company management and the board or special committee appointed by the board.