At a Glance

• In Hyde Park Venture Partners Fund III, L.P. v. FairXchange, LLC, the Delaware Court of Chancery determined that stockholder plaintiffs with a board-designee are deemed to be within the corporation’s circle of confidentiality, even with respect to communications covered by the attorney-client privilege.
• One year later, in Icahn Partners, LP, et al. v. Francis deSouza, et al., the Court of Chancery held that minority stockholders were not entitled to the nominal defendant’s privileged and confidential information because they did not unilaterally control the appointment of the director they nominated for the company’s board.
• Most importantly, a stockholder that simply nominates or votes in favor of a director is not entitled to the joint client privilege. Rather, to be within the circle of confidentiality, the stockholder must have the power to appoint the director or control her election, or have a fiduciary relationship with the director that is independent from the duties the director owes to the corporation.

Icahn Partners, LP, et al. v. Francis deSouza, et al. and Illumina, Inc., C.A. No. 2023-1045-PAF, order (Del. Ch. Feb. 19, 2024)

Under Delaware law, corporate directors, who bear responsibility for managing the company and owe fiduciary duties, are considered joint clients of the company’s counsel and are entitled to the company’s attorney-client privileged communications. Stockholders, on the other hand, are usually viewed as outside of the circle of confidentiality, enabling the company to invoke privilege against the stockholder. In March 2023, however, the Delaware Court of Chancery held that a company cannot withhold privileged communications from investor fund plaintiffs because the funds appointed a director to the board with the “implicit expectation that the director can share information with” them. Hyde Park Venture Partners Fund III, L.P. v. FairXchange, LLC, 292 A.3d 178 (Del. Ch. 2023). As a result, the court determined that stockholder plaintiffs with a board-designee are deemed to be within the corporation’s circle of confidentiality, even with respect to communications covered by the attorney-client privilege.

Following Hyde Park, there has been a lot of handwringing from company counsel concerned that any entity, fund or person that succeeds in having their nominee added to a company’s board would then be entitled to that company’s privileged materials. From there, it would be difficult, if not impossible, for the company to protect its privilege and safeguard against the improper dissemination of attorneys’ mental impressions, advice or strategy. Recently, the decision in Icahn Partners, LP, et al. v. Francis deSouza, et al., addressed that fear. In that case, the court held that minority stockholders were not entitled to the nominal defendant’s privileged and confidential information because they did not unilaterally control the appointment of the director they nominated for the company’s board.

The stockholder plaintiffs in Icahn Partners (entities controlled by nonparty Carl Icahn) asserted direct and derivative breach of fiduciary duty claims against the nominal defendant’s board members for approving and consummating an acquisition that violated the standstill imposed by antitrust authorities. The plaintiffs’ lawsuit relied, in part, on the nominal defendant’s privileged and confidential information, which the plaintiffs received from a director that they nominated to the company’s board. After learning about the source of the plaintiffs’ claims, the nominal defendant moved to strike the privileged and confidential information from the complaint. The stockholder plaintiffs opposed that motion, arguing that because they nominated the director to the company’s board and he was employed by an Icahn-controlled entity, the stockholder plaintiffs were within the company’s circle of confidentiality and thus have as much entitlement to that information as the nominal defendant.

Vice Chancellor Fiorivanti was not swayed by the plaintiffs’ arguments and granted the nominal defendant’s motion to strike. The court concluded that the joint client privilege applies to stockholders with appointment rights or the ability to control or enforce fiduciary duties against the appointed director. The joint client privilege, however, does not apply to minority stockholders, like the nominal plaintiff, who simply nominated a successfully elected board candidate. Unsatisfied with the court’s holding, the stockholder plaintiffs moved for reargument. The Court of Chancery also denied that motion, finding no error in the previous decision because, among other things, the plaintiffs did not: (1) unilaterally control the election or designation of the director, which is required to be within the circle of confidentiality; (2) establish that their board nominee was a dual fiduciary to the company and the stockholder plaintiff; or (3) offer a reasonable explanation why the director at issue would not be bound by the company’s code of conduct, which barred the dissemination of privileged or confidential information.

Takeaway

The sky is not falling. While Hyde Park may have been unsettling for company counsel that did not ordinarily consider a stockholder with a board designee to be within a company’s circle of confidentiality, Icahn Partners provides some meaningful guardrails. Most importantly, a stockholder that simply nominates or votes in favor of a director is not entitled to the joint client privilege. Rather, to be within the circle of confidentiality, the stockholder must have the power to appoint the director or control her election, or have a fiduciary relationship with the director that is independent from the duties the director owes to the corporation.