The attorney-client privilege encourages full and frank communication between attorney and client, whether the client is an individual or a large corporation. Protecting confidential communications promotes broader public interests in the observance of law and the administration of justice. However, in shareholder derivative actions alleging harm by the corporation against stockholders, some courts have held that the corporate attorney-client privilege should be balanced with the interests of the shareholders, and that the privilege may therefore be subject to limitations. This is known as the “fiduciary exception,” which was recently upheld in Delaware.
The so-called fiduciary exception to the attorney client privilege was adopted by the Supreme Court of Delaware in Wal-Mart v. Indiana Electrical Workers Pension Trust Fund. That case arose from a 2012 New York Times article, which described a scheme of illegal bribery payments made at the direction of a company executive from 2002 to 2005 and further claimed that corporate leadership was aware of the conduct but failed to take sufficient action to stop it. According to the article, the general counsel of the company was notified of “irregularities” and hired outside counsel to launch a thorough investigation. However, senior executives later rejected this proposal and instead ordered an internal inquiry that was limited in scope and that failed to uncover the wrongdoing.
After publication of the article, the company received a letter from a shareholder workers’ pension fund requesting inspection of documents relating to the alleged bribery. The fund claimed that the documents were necessary to determine if any executives had breached their fiduciary duty to the company. The company agreed to the demand, but declined to provide any document that it believed was protected by the attorney-client privilege. Given this redaction, the pension fund filed a complaint in the Delaware Court of Chancery alleging deficiencies in the company’s production, and obtained a court ruling requiring the company to produce additional documents, including documents protected by the attorney-client privilege.
client privilege to require the production of otherwise confidential documents. In addressing this claim, the Delaware Supreme Court noted that under the fiduciary exception client privilege in order to prove fiduciary breaches by those in control of the corporation upon a showing of good cause. The Delaware Supreme Court then held that the corporation proceedings in Delaware.
The Court continued that the pension fund had met its burden of showing “good cause” in order to invoke the exception because the information was required to determine whether a cover-up took place by the company, and what details were shared with the company board. Accordingly, the Court determined that the documentary information sought in the demand should be produced pursuant to the fiduciary exception to the attorney-client privilege.
Privileges strengthen the professional-client relationship. However, privileges are not absolute. Significantly, mere involvement of legal counsel in internal company investigations of wrongdoing may not shield the communications from shareholder disclosure, particularly in cases involving management wrongdoing. It is therefore essential that professionals understand the limitations and anticipate potential exceptions. Failure to do so could mean the unintended disclosure of otherwise confidential professional-client communications.