January 2008
The Delaware Chancery Court issued a ruling in Ryan v. Gifford, C.A. No. 2213-CC (Del. Ch. Nov. 30, 2007) that runs afoul of current common practice in dealing with investigations performed by a Special Committee of the Board of Directors. Although the case involves stock option backdating, the rationale applies equally to any situation in which a member of the Board of Directors has been personally named as a defendant (which is most of the time).
In this case, Maxim’s Board of Directors created a Special Committee to investigate concerns about stock option backdating. The Special Committee shared its report with the entire Board of Directors. As commonly occurs, the special investigation involved related to plaintiff claims that named members of the Board of Directors. Plaintiffs sought all aspects of the Special Committee’s work, including communications with its legal counsel, based on the premise that the attorney-client privilege had been waived because the Special Committee’s report had been shared with the full Board of Directors, which included those accused of wrongdoing.
The Court agreed with Plaintiffs, and concluded that the privilege had been waived. The Court held that this waiver with respect to the report “operate as a complete waiver for all communications regarding this subject matter” as a matter of Delaware law. According to the Court,
“[t]he presentation of the report constitut[ed] a waiver of privilege because the client, the Special Committee, disclosed its communications concerning the investigation and final report to third parties — the individual director defendants and [their counsel] — whose interests are not common with the client, precluding application of the common interest exception to protect the disclosed communications.”
The Court concluded that the common interest exception, which extends the attorney-client privilege to communications between those who share a common interest, did not apply because:
“[t]he individual defendants, though directors on the board of Maxim, cannot be said to have interests that are so parallel and non-adverse to those of the Special Committee that they could reasonably be characterized ‘joint venturers’ . . . . The Special Committee was formed to investigate wrongdoing and in response to litigation in which certain directors were named as individual defendants. This describes a relationship more akin to one adversarial in nature.”
The case questions typical special committee practice, in which committees frequently render a final report and make a presentation to the full board. Historically, this has not caused a complete privilege waiver. From a practical perspective, it will be difficult for a Board of Directors to exercise its fiduciary responsibilities without receiving a report from a Special Committee that it commissioned, particularly when most (maybe all) of its members have been personally named in a related lawsuit.
The case also has interest because the Court addressed production of native files and related metadata. Although other jurisdictions have addressed this question, we are not aware of prior rulings on this subject from the important Delaware Chancery Court. In granting the plaintiff’s motion, the court explained:
“[M]etadata may be especially relevant in a case such as this where the integrity of dates entered facially on documents authorizing the award of stock options is at the heart of the dispute. This relevance is further illustrated by the fact that Maxim’s special committee, as well as Deloitte & Touche, undoubtedly reviewed metadata as part of their investigation into the backdating problems at Maxim. This latter fact also undermines the asserted burdensomeness of producing documents in native file format.”
Fulcrum Inquiry is a forensic accounting firm that performs financial investigations. Fulcrum also operates turnkey whistleblower complaint systems.