21 August 2020

Management of a Delaware Corporation Cannot Unilaterally Withhold Privileged Information From Directors

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The Delaware Chancery Court recently found that directors serving on a special committee were entitled to privileged communications between management and company counsel because there was no formal board process to wall off those directors or other actions at the board level demonstrating “manifest adversity” between the company and those directors.

The Delaware Chancery Court recently held that officers of a Delaware corporation may not unilaterally prevent a director from obtaining privileged information of the company. In re WeWork Litig., C.A. 2020-0258-AGB (Del. Ch. Aug. 21, 2020). The case involves a series of transactions between WeWork and SoftBank by which SoftBank first obtained effective control of WeWork and then pursued a tender offer to obtain additional shares. WeWork’s board of directors had formed a special committee to oversee the proposed series of transactions with SoftBank. After SoftBank terminated the tender offer in April 2020, the special committee filed a lawsuit against SoftBank alleging a breach of its contractual obligations to use reasonable best efforts to consummate the transaction and a breach of fiduciary duties owed by SoftBank, as the controlling stockholder, to consummate the transaction.

SoftBank sent the board a letter requesting confirmation that the special committee did not have the authority to bring the lawsuit on behalf of the company because directors serving on the special committee had a conflict of interest. Six weeks later, WeWork’s board formed a new committee comprising two newly appointed temporary directors to determine whether the special committee was authorized to pursue the litigation. WeWork’s management team worked closely with inside counsel and outside counsel in forming the new committee.

The new committee determined that the special committee did not have the authority to initiate the lawsuit against SoftBank and, following the new committee’s recommendation, the company filed a motion, joined by management, to dismiss its complaint against SoftBank. The special committee opposed the motion to dismiss and sought discovery of privileged communications among management, inside counsel, outside counsel, and the new committee to assess the decision and justifications for forming the new committee. Management opposed this discovery request alleging that the special committee was adverse to the company and, thus, should be restricted from accessing privileged materials.

Chancellor Andre Bouchard ruled in favor of the special committee, holding that directors are to be treated as a joint client with the company and are always entitled to communications between management and company counsel unless there is a formal board process to wall off such directors (e.g., forming a special committee) or other actions at the board level demonstrating “manifest adversity” between the company and those directors.

Despite the somewhat unique set of facts, this case illustrates the practical principle that directors may obtain corporate information, including privileged information, absent limited exceptions. Management, on its own, cannot make the determination to withhold corporate information from directors; the board must first make it clear to the excluded director(s) that the corporation’s interests are adverse to the director’s interests and that the withheld information relates to the adverse matter. To avoid this, the board may form a special committee prior to any communications between management and counsel. In that case, any legal advice provided in connection with the special committee’s role would be more likely to be shielded from discovery from directors not serving on the special committee.