In Ryan v. Gifford, C.A. No. 2213, 2007 WL 4259557 (Del. Ch. Nov. 30, 2007), the Delaware Chancery Court ruled that the presentation of a Special Committee report to the full Board of Directors of Maxim Integrated Products, Inc., including individual director defendants and their counsel, waived the attorney-client privilege as to all communications between the Special Committee and its lawyers. This decision is significant because of its implications for special committee practice. After Ryan, there is a considerable risk that the attorney-client privilege will not be available to a Special Committee and its counsel when conducting an internal investigation if the Special Committee chooses to give a report to the full board with named defendants in attendance.
In this case, the Maxim board of directors created a Special Committee to investigate concerns about stock option backdating. Shareholder derivative plaintiffs sought to compel Orrick Herrington & Sutcliffe LLP, counsel to the Special Committee, and Maxim to produce all communications between Orrick and the Special Committee and Maxim. Plaintiffs sought discovery concerning the communications between Orrick and the Special Committee that occurred throughout the course of the Special Committee’s investigation, as well as Orrick’s presentation of the final report to the Special Committee and the board of directors. Orrick and Maxim asserted that the attorney-client privilege applied to the communications sought by plaintiffs and that this privilege had neither been waived nor vitiated by a showing of good cause by plaintiffs.
The court concluded that the privilege had been waived. Although plaintiffs had only established waiver of the privilege as to the presentation of the report, the court held that this “partial waiver operate[d] as a complete waiver for all communications regarding this subject matter” as a matter of Delaware law, entitling plaintiffs to all communications between Orrick and the Special Committee related to the investigation and final report. According to the court, “[t]he presentation of the report constitut[ed] a waiver of privilege because the client, the Special Committee, disclosed its communications concerning the investigation and final report to third parties — the individual director defendants and [their counsel] Quinn Emmanuel — whose interests are not common with the client, precluding application of the common interest exception to protect the disclosed communications.”
The common interest exception, which extends the protections of the attorney-client privilege to disclosures of communications among parties who share a common interest, did not apply, the court held, because “[t]he individual defendants, though directors on the board of Maxim, cannot be said to have interests that are so parallel and non-adverse to those of the Special Committee that they could reasonably be characterized ‘joint venturers’ . . . . The Special Committee was formed to investigate wrongdoing and in response to litigation in which certain directors were named as individual defendants. This describes a relationship more akin to one adversarial in nature.” As a result, the court ordered Maxim to produce all communications between Orrick and the Special Committee and Orrick and Maxim.
In light of this decision, companies, boards and their counsel now must take extra care in deciding whether to present investigation reports to a full board, and whether to exclude particular board members and their individual counsel from such presentations, in order to preserve the privilege.
For further information, please contact John Stigi at (213) 617-5589.