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Delaware Supreme Court Allows Shareholders Access to Corporation’s Attorney-Client Privileged Documents

Corporate and Securities Alert | August 12, 2014
By: Marc S. Casarino and Lori S. Smith

Delaware corporations may be required to turn over internal documents of directors and officers, including those of in-house counsel, where the factors enumerated in Garner v. Walfinbarger, 430 F.2d 1093 (5th Cir. 1970) weigh in favor of disclosure. In a July 23, 2014 decision of first-impression, the Delaware Supreme Court ruled in Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust Fund IBEW, that the Garner doctrine applies to plenary shareholder/corporation disputes, as well as to books and records inspection actions under Section 220 of the Delaware General Corporation Law. The Garner doctrine provides that a shareholder may invade the corporation’s attorney-client privilege in order to prove fiduciary breaches by those in control of the corporation upon a showing of good cause. The non-exhaustive list of factors by which a finding of good cause should be tested are:

(i) the number of shareholders and the percentage of stock they represent; (ii) the bona fides of the shareholders; (iii) the nature of the shareholders’ claim and whether it is obviously colorable; (iv) the apparent necessity or desirability of the shareholders having the information and the availability of it from other sources; (v) 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; (vi) whether the communication is of advice concerning the litigation itself; (vii) the extent to which the communication is identified versus the extent to which the shareholders are blindly fishing; and (viii) the risk of revelation of trade secrets or other information in whose confidentiality the corporation has an interest for independent reasons.

In Wal-Mart, shareholder IBEW filed a Section 220 action for inspection of books and records related to alleged bribes made by executives of Wal-Mart’s Mexican subsidiary to Mexican officials. IBEW’s stated reasons for the inspection were to investigate (1) mismanagement in connection with the bribery allegations; (2) the possibility of breaches of fiduciary duties by company executives in connection with the allegations; and (3) whether a pre-suit demand on the board would be futile. Applying the Garner factors, the Chancery Court ordered Wal-Mart to produce documents it had withheld pursuant to the attorney-client privilege; and also ordered the production of documents under Chancery Rule 26(b)(3) which had been withheld pursuant to the attorney work product doctrine. The Chancery Court considered the Garner factors in its Rule 26(b)(3) analysis. Wal-Mart argued that the Chancery Court had erred in applying the Garner doctrine to documents that are protected by the attorney-client privilege as the Garner doctrine had never previously been endorsed by the Supreme Court in a plenary proceeding or in a summary Section 220 proceeding. Wal-Mart additionally argued that (a) the Court erred by improperly applying the Garner doctrine to protected attorney work product claiming that Garner should be limited to attorney –client privilege and not work product and that (b) the Chancery Court should have applied solely Chancery Rule 26(b)(3), which would give a party access to non opinion work product “upon a showing that the party seeking discovery has substantial need of the materials in the preparation of the party’s case and that the party is unable to without undue hardship to obtain the substantial equivalent of the materials by other means”.  

Affirming the Chancery Court’s rulings on appeal, the Supreme Court ruled that the Garner doctrine should be applied in plenary stockholder/corporation proceedings and is applicable to a Section 220 action. The Supreme Court noted that on at least three prior occasions, the Court of Chancery had expressly adopted Garner as a valid exception to attorney-client privilege in the context of Section 220 book and records actions.  However, for inspection of books and records actions pursuant to Section 220, the Court held that the trial court must first determine whether the demand meets the necessary and essential threshold of Section 220 before engaging in the good cause analysis under the Garner disclosure doctrine because the necessary and essential inquiry is dispositive on the issue of the scope of the document production to which the plaintiff is entitled. Further, since there is overlap between the standard for disclosure of attorney work product under Rule 26(b)(3) and the Garner factors, the Court concluded that it was acceptable for the trial court to refer to the Garner factors in connection with  its work product analysis as its ruling was properly and solely based upon Rule 26(b)(3).

For additional information on these matters, please contact Marc Casarino (casarinom@whiteandwilliams.com | 302.467.4520) or Lori Smith (smithl@whiteandwilliams.com | 212.714.3075). 

This correspondence should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult a lawyer concerning your own situation and legal questions.
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