Delaware Likes Garner/California Not So Much

by Allen Matkins
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In 1970, Richard Nixon was president, the 26th Amendment was still not part of the Constitution, and the Fifth Circuit Court of Appeals issued its opinion in Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970).  In that case, Judge Godbold wrote:

The attorney-client privilege still has viability for the corporate client.  The corporation is not barred from asserting it merely because those demanding information enjoy the status of stockholders.  But where the corporation is in suit against its stockholders on charges of acting inimically to stockholder interests, protection of those interests as well as those of the corporation and of the public require that the availability of the privilege be subject to the right of the stockholders to show cause why it should not be invoked in the particular instance.

430 F.2d at 1103-04 (footnote omitted).  Thus, if a stockholder was able to show cause, it just might be able to access attorney-client privileged communications to prove a breach of fiduciary duty.  Although the Delaware Court of Chancery has expressly adopted Garner in the context of stockholder books and records actions (often referred to as “Section 220 actions” based on the Delaware Code section number), the Delaware Supreme Court hasn’t said whether it agreed - until now.

In Wal-Mart Stores v. Ind. Elec. Workers Pension Trust Fund IBEW, 2014 Del. LEXIS 336 (Del. July 23, 2014), the Delaware Supreme Court sitting en banc held the Garner rule:

  • should be applied in plenary stockholder/corporation proceedings; and
  • is applicable in a Section 220 action.

These holdings contrast sharply with California’s approach, as explained in this Court of Appeal decision:

It has been suggested, and indeed adopted by some federal courts, that a case-by-case finding of good cause, including a likelihood that the corporate decision would be outside the protections of the business judgment rule, could be grounds for allowing the shareholders access to privileged information in any lawsuit they brought on the corporation’s behalf.  (See, e.g., Garner v. Wolfinbarger (5th Cir. 1970) 430 F.2d 1093, 1103–1104.)  However, long-standing California case authority has rejected this application of the federal doctrine, noting it contravenes the strict principles set forth in the Evidence Code of California which precludes any judicially created exceptions to the attorney-client privilege.  (Dickerson v. Superior Court (1982) 135 Cal. App. 3d 93, 99 [185 Cal. Rptr. 97]; Hoiles v. Superior Court, supra, 157 Cal. App. 3d at p. 1198.)  In light of this history, the creation of any shareholder right to waive the privilege in a derivative action should be left to the California Legislature.

McDermott, Will & Emery v. Superior Court, 83 Cal. App. 4th 378, 385 (2000).

For more on the attorney-client privilege in the corporate setting and Garner, you may want to check out my article:  The Attorney-Client Privilege and the Corporate Lawyer, 29 Cal. Bus. Law Pract. 46 (Spring 2014).

 

 

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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