Corporate governance litigation: 2007 review: report from Delaware: a spotlight on several court rulings that moved the governance needle

Directors & Boards, Summer, 2008 by John L. Reed, Paul D. Brown

Fogel petitioned the court for an order compelling the board to hold a special meeting. The court determined that Fogel was not terminated on the morning of June 29 because the independent directors' decision was not a valid corporate act. A board can only take action by means of a vote at a properly constituted meeting. "The mere fact that directors are gathered together does not a meeting make," noted the court. Although there is not a clear rule indicating that a director must be given notice of all matters to be considered at a meeting, directors must be given notice sufficient to allow them to protect their interests. Here, the court observed that even if a proper meeting had been held on June 29, Fogel was tricked or deceived as to the true purpose of that meeting and that the independent directors' failure to inform Fogel of their plan to terminate him was intentional. The court ordered the board to hold a special meeting. This case is significant because it demonstrates how a failure to comply with corporate formalities can have a palpable impact on governance issues.

The attorney-client privilege

After the Court of Chancery refused to dismiss the Ryan v. Gifford backdating case, discovery proceeded. In a letter opinion addressing various discovery motions, the court addressed an issue with potential implications for special committee practice. The court ruled on plaintiffs' motion to compel the company (including the special committee created to investigate the backdating allegations) and the committee's legal and accounting advisors to produce all communications between the special committee and its counsel are privileged.

Here, the court ruled that plaintiffs were entitled to communications between the company and the committee's counsel regarding the committee's investigation and report, primarily because that information, which was of paramount importance to plaintiffs' case, was unavailable from other sources. Then, the court went on to determine that even if the company and the committee share a joint privilege as to communications between the committee and its counsel, that privilege was waived. The basis for the finding of waiver was the committee's presentation of the report to third parties, including certain directors who were the subject of the investigation. These directors, held the court, did not share common interests with the corporation.

Following the court's ruling, special committees must proceed with caution. If a special committee of independent directors reports the reasoning behind its conclusions to the full board of directors, all of the committee's communications with counsel addressing the same subject matter are potentially subject to discovery. It is important to note, however, that the specific facts of this case compelled the result. In contrast, the same chancellor who issued the Ryan v. Gifford decision decided Saito v. McKesson HBOC, Inc. in 2002, in which he held that a company does not waive the attorney-client or work product privileges when it shares information with the SEC during an SEC investigation provided that a confidentiality agreement is in place.