Chancery Holds That Management Does Not Have Unilateral Authority to Preclude a Director From Obtaining the Company’s Privileged Information

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In Re WeWork Litig., Consol. C.A. No. 2020-0258-AGB (Del. Ch. Aug. 21, 2020)

In October 2019, The We Company’s (the “Company”) board of directors established a special committee (the “Special Committee”) to evaluate a potential transaction wherein SoftBank, the controlling shareholder, would acquire majority economic ownership and voting control of the Company. When SoftBank terminated the transaction, the Special Committee filed this action on behalf of the Company alleging that they had breached their contractual obligations to use reasonable best efforts to purchase $3 billion of the Company’s stock in a tender offer.

SoftBank asked the board of directors to confirm that the Special Committee did not have the authority to pursue the litigation. In May 2020, the Company’s board of directors formed a new committee consisting of two temporary directors (the “New Committee”) to evaluate the proper scope of the Special Committee’s authority. At the direction of the New Committee, the Company filed a motion under Court of Chancery Rule 41(a) for leave to voluntarily dismiss the complaint.

In its attempts to oppose the motion, the Special Committee sought access to certain privileged communications between management of the Company and its in-house and outside counsel. Specifically, the Special Committee sought information relating to how the New Committee was formed and whether it was influenced by management. The Special Committee did not seek the privileged information between the New Committee and its counsel.

The general rule in Delaware is that a company cannot deny a director access to legal advice furnished during the director’s tenure, unless one of three exceptions explained in Kalisman v. Friedman, 2013 WL 1668205, applies. The Court held that the only exception asserted here did not apply because there was no clear adversity between the Special Committee and the Company and because the board of directors never made the decision to withhold the privileged information. Instead, management made the decision unilaterally. The Court found that because it is the board of directors – and not management – who must oversee a company’s affairs, only the board of directors or a committee thereof may be authorized to prevent a director with adverse interests from obtaining the company’s privileged information. Therefore, the Special Committee was entitled to the information it sought.

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