Delaware Court Addresses the Privilege Implications of an Evenly Split Corporate Board’s Feud

McGuireWoods LLP

Not surprisingly, Delaware state courts frequently address privilege issues triggered by corporate board disputes. Those often guide other states' courts' analyses of similar scenarios.

In In re Aerojet Rocketdyne Holdings, Inc., C.A. No. 2022-0127-LWW, 2022 Del Ch. LEXIS 106 (Del. Ch. May 5, 2022), a company's board split evenly between a bloc supporting the board's chairman and a bloc supporting the CEO (who, among other things, had arranged for a Special Committee to investigate the board chairman's alleged misdeeds). As the company prepared for contested board elections, the CEO's management team (represented by Gibson Dunn) denied the chairman's board allies access to company-related privileged communications. Although understandably acknowledging that his bloc was not entitled to the Special Committee's documents, the chairman argued that his bloc was entitled to all other privileged communications under Delaware law. The court agreed – even ordering Gibson Dunn to withdraw as the company's lawyer. Id. at *6. The court bluntly stated that "where two halves of a deadlocked board are competing in a proxy contest, can one half assert the corporation's privilege against the other? I conclude that, in these circumstances, it cannot." Id. at *2.

In describing the two board bloc's claims against each other in light of the upcoming board election, the court wisely noted that "[w]hy one slate should be considered hostile to the Company and the other friendly is unclear." Id. at *11. Lawyers should remember that generally corporations just want to thrive – they really do not care who runs them.

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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