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Court Compels Production of Privileged Documents to Shareholders

By Caitlin Haney, Litigation News Associate Editor – December 1, 2014

 

The attorney-client privilege and work product protection may not shield corporate documents from shareholder inspection, according to Walmart Store, Inc. v. Indiana Electrical Workers Pension Fund IBEW. Shareholder accessibility may prevent, or at least dissuade, corporate and in-house counsel malfeasance.


Allegations of Wrongdoing
The shareholders’ concerns arose from alleged bribes paid benefitting Walmex, a Walmart subsidiary that violate both U.S. and Mexican law. The outside law firm Walmart’s general counsel initially contacted created a proposal for a thorough investigation of the allegations. Walmart’s senior executives rejected the outside firm’s proposal, opting instead for an internal investigation led by Walmex’s general counsel, who was an early target of the investigation. A two-week investigation cleared Walmex of wrongdoing.


The shareholders brought an action to inspect the corporate books and records, as allowed under Section 220(b) of the Delaware General Corporation Law, which permits such inspection after the shareholders establish a proper purpose. After a Section 220 trial on the papers, the Delaware Chancery Court entered its final order compelling Walmart to produce documents relating to the Walmex allegations, policies and procedures regarding FCPA compliance, and policies and procedures relating to internal investigations. The chancery court also compelled the production of the contents of responsive documents protected by the attorney-client privilege or work product doctrine, subject to the requirement that plaintiffs take appropriate steps to protect the confidentiality of Walmart’s privileged documents.


On appeal, Walmart argued that the lower court compelled production of documents that far exceed the proper scope of a Section 220 request. Walmart complained that producing documents spanning seven years, searching disaster recovery tapes, producing officer-level documents, and producing documents known to exist by Walmart’s Office of the General Counsel exceeds the proper scope of discovery. The company further contended that the lower court improperly and incorrectly applied and relied on the Garner doctrine to allow discovery of documents protected by the attorney-client privilege and work product protection. The Delaware Supreme Court rejected these arguments and affirmed the lower court’s decision.


The Garner Factors
In the Walmart decision, the court clarified for the first time that the Garner doctrine is available to litigants in Delaware, including stockholders, in the context of Section 220 litigation. Under the Garner doctrine, litigants must show good cause why the privilege or protection should not apply in a certain case. The court listed several factors relevant to the good cause inquiry, including, but not limited to the bona fides of the stockholders; the nature of the shareholder’s claim; availability of the information from another source; whether the corporation’s alleged wrongdoing is criminal, illegal, or of doubtful legality; whether the communication is identified or the shareholders are blindly fishing; and the risk of revelation of trade secrets.


Shareholders Must Show Good Cause
Shareholders who can prove there “is no other way to get the needed information to evaluate whether the officers or directors abided by their fiduciary duties without getting documents subject to attorney-client and work product protections” will be more successful in showing good cause, according to Sean O’D. Bosack, Milwaukee, WI, vice-chair of the ABA Section of Litigation’s Corporate Counsel Committee. This is especially true when there is “substantial evidence the investigation was not performed properly,” notes Bosack.


Further, “the illegality and criminal nature of the purported wrongful action” can go a long way in persuading courts that good cause exists, according to C. Pierce Campbell, Florence, SC, co-director of Division II of the Section of Litigation. A court will “exercise its responsibility to ensure justice in our society. The more wrongful the conduct, the more the court is willing to assist in making sure that justice can be found by those seeking it,” adds Campbell.


Preserving the Attorney-Client Privilege
“Had the defendants followed best practices,” the court may have been less likely to abrogate the attorney client and work productions, notes Bosack. For example, the attorney-client privilege may be better protected when an “audit committee hires outside counsel and the audit committee is the client, because attorney-client communications would actually belong to the audit committee, not the corporation,” says Bosack. The mere act of “hiring outside counsel may also be evidence that they discharged their fiduciary duty,” lessening other Garner factors, Bosack opines.


The strongest protection Garner provides defendants is “the extent to which communications must be specifically identified,” argues Campbell. This factor is “a powerful tool for defense counsel, as it will be hard for shareholder to specifically identify some of these documents. Defense counsel can argue to the court that this is a blind fishing expedition,” Campbell observes. If there is an attorney whistleblower who “can identify the specific communications and how they are stored, they can be the key to the shareholders,” warns Campbell.


Unfortunately, “a lot of the Garner factors are out of the attorneys’ hands,” says Campbell. “The only thing attorneys have control over is whether or not the attorney-client information is intertwined with trade secret issues that do not need to be displayed to the public.”


Keywords: Delaware, attorney-client privilege, work product protection, shareholder


 
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