Lewis H. Lazarus partner with Morris James. Courtesy Photo
An employee, agent or principal of an investor is often designated to serve on a company’s board of directors when that company receives an investment or acquires the investor. That board member then becomes privy to legal advice the company receives from its counsel. If the director leaves the board he or she is no longer within the circle of confidentiality that entitles the director to have access to the company’s future privileged communications. What happens however when there is a cash out merger, the investor seeks appraisal and then seeks privileged communications its designee received while on the board related to the transaction that spawned the appraisal action? In Hyde Park Venture Partners Fund III v. Fairxchange, C. A. No. 2022-0343-JTL (Del. Ch. March 9, 2023) the Delaware Court of Chancery reaffirmed the joint client concept of corporate privilege and held that the company could not assert privilege against a former director or his designating investor except as to a books and records demand in which the company and the director were contemporaneously adverse.
Background
The plaintiff, a venture capital firm, invested in a Delaware corporation and acquired the right to designate a person to serve on the company’s board of directors. While so serving, the designee received privileged communications and other information that he presumptively shared with his designating investor. Later the director disagreed with the other members of the board as to whether the company should accept a merger proposal, preferring that the company retain a financial advisor to provide valuation advice and to assist in pursuing financing. When he disagreed with the rest of the board as it considered the merger proposal, he made a demand for books and records as a director. Thereafter, other stockholders acted by written consent to remove him as a director. The merger closed and the designating investor pursued an appraisal action. In the appraisal litigation the company’s successor in the merger asserted the attorney-client privilege to withhold documents reflecting privileged communications while the director had been on the board. The designating investor moved to compel as to all documents so withheld except for those relating to the former director’s books and records claim as to which both parties agreed the company and the designated director were adverse.
