A few months ago, Vice Chancellor J. Travis Laster issued an interesting decision involving director inspection rights and the attorney-client privilege.  Kalisman v. Friedman, 2013 Del. Ch. LEXIS 100 (April 17, 2013).  Previously, I had posted on two California cases dealing with this issue.  See When is a Director’s Inspection Right Not Absolute? and Defining The Metes And Bounds Of A Director’s Absolute Right To Inspect.

Kalisman involved the efforts of a corporation to deny one of its directors access to information based on an assertion of the attorney-client privilege.  In analyzing this claim, Vice Chancellor Laster described the director as a “joint client of the subpoenaed law firms”.  According to the decision, joint clients under Delaware law may not assert the privilege against one another.  If California law were applied, I’m not certain that the same analysis would apply.

Under California law, a corporation is a person.  Cal. Evid. Code § 175.  A corporation’s confidential communications with its attorney are protected by the attorney-client privilege.  D.I. Chadbourne, Inc. v. Superior Court  60 Cal.2d 723, 732 (1964).  Moreover, the attorney’s duty of loyalty is to the corporate entity: “In representing an organization, a member shall conform his or her representation to the concept that the client is the organization itself, acting through its highest authorized officer, employee, body, or constituent overseeing the particular engagement.”  Cal. Rules Prof. Conduct, Rule 3-600(A).  Thus, it seems to me that if California law were applied, the decision to assert the privilege would rest with a majority of the board or committee overseeing the engagement.

The fact that a majority of a board or a committee has the power to assert or waive the privilege does not answer the question of whether the assertion of the privilege defeats a director’s “absolute” right of inspection under Corporations Code Section 1602.  In Wolf v. CDS Devco, 185 Cal.App.4th 903 (2010), the Fourth District Court of Appeal observed that a director could be denied the right to inspect corporate documents based on the director’s “potential adversary status to [the corporation],” as illustrated by the inspection request.  See also Tritek Telecom, Inc. v. Superior Court, 169 Cal. App. 4th 1385 (2009) (Director who makes inspection demand after filing a shareholder suit against the corporation has no right of inspection of attorney-client privileged documents generated in defense of the shareholder lawsuit.)   In an unpublished opinion, the First District Court of Appeal rejected this limitation as “erroneous dicta” because  “the [Wolf] court was discussing a former director’s lack of standing to inspect corporate documents, which made the director’s potentially adversarial posture irrelevant.”  Quinn v. Aechelon Technology, 2011 Cal. App. Unpub. LEXIS 3024 (April 25, 2011). 

If you are representing a Delaware corporation or director of a Delaware corporation, should you be concerned about California law?  The answer is yes if the corporation either has its principal exectuive office in California or customarily holds meetings of its board in California. Cal. Corp. Code § 1602.  See Havlicek v. Coast-to-Coast Analytic Servs., Inc., 39 Cal. App. 4th 1844 (1995) and my article, Court of Appeal Applies California Inspection Rights to Delaware Corporation, 17 CEB Cal. Bus. L. Rep. 168 (1996).

Another interesting question is what attorney-client privilege are we talking about in these cases?  States define and apply the attorney-client privilege differently.  If a director of a Delaware corporation asserts her right to inspect under California Corporations Code Section 1602 and the corporation asserts the privilege, is it the privilege as defined by California or Delaware?

 

Topics:  Attorney-Client Privilege, Board of Directors, Corporate Governance, Corporate Officers, Directors, Duty of Loyalty, Incorporation, Inspections

Published In: Business Organization Updates, Civil Procedure Updates, General Business Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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