Recent case--committee (and attorney) minutes, notes and investigation materials may be discoverable.


By Dave Tate, CPA, Esq. - Every board, audit committee and special committee should be aware of the recent November 30 decision by the Delaware Court of Chancery in Ryan, et al. v. Gifford, et al. Defendant Maxim Integrated Products, Inc. had formed an independent Special Committee of the board to investigate allegations of improper stock option backdating. The Special Committee was represented by the Orrick law firm. In pertinent part, plaintiffs sought to compel Orrick, the Special Committee and the outside forensic accountant to produce discovery of all communications between Orrick and the Special Committee, and Orrick’s presentation of the final report to the Special Committee and Maxim’s board of directors. Plaintiffs also sought discovery of interviews of thirty-two individuals conducted during the course of the investigation. Maxim, Orrick and the Special Committee argued that the discovery requested was protected by the attorney client privilege, the attorney work product doctrine, and the joint or common interest or privilege doctrine.

In its decision the Court noted that in this case the board of Maxim appointed the Special Committee to investigate the allegations of backdating, but did not authorize the Committee to make a binding determination on behalf of the board or Maxim regarding what should be done regarding the allegations. In other words, the board retained its ultimate power and authority to make final decisions–the Special Committee was to report the results of its investigation to the board for further determination. See also Zapata v. Maldonado (Del. 1981) 430 A.2d 779, which was cited by the Court as an example where a board had delegated to the Special Committee authority to make a final determination. The Court also cited Delaware Corporations Code section 141 authorizing a board to delegate decision making authority to a committee; see also Cal. Corporations Code section 9212 authorizing similar board designation of decision making authority.

The Court held that absent waiver or good cause the attorney client privilege protects communications between Orrick and its client the Special Committee. Maxim sought to protect from discovery communications between Orrick and Maxim claiming that Maxim and the Special Committee had a common or joint interest. The Court in part held that there was no such privilege between Orrick and Maxim regarding the investigation and the report because the information that Orrick had obtained was now unavailable from other sources. In pertinent part, witnesses who had been interviewed were now unavailable or had claimed the Fifth Amendment privilege. Certain attorney work product materials may be discoverable if they are of a sufficient important nature and if the information is not available through other sources or means.

Perhaps more interesting, the Court held that even if Maxim and the Special Committee did share a joint or common interest privilege, that privilege was waived as to the presentation of the report to the board. However, the Court further held that the limited waiver of the privilege as to the presentation of the report to the board also operated as a complete waiver of all communications regarding the subject matter of the report which would extend to all communications between Orrick and the Special Committee relating to both the investigation and the final report.

On January 18 and 19, 2007 the Special Committee presented its final report to Maxim’s board of directors. The Court held that the presentation was not a mere acknowledgment of the existence of the report but also included detailed discussions. Individual director defendants and their attorneys were present at the meeting presentation. It appears that legal counsel for the individual director defendants also acted as legal counsel for Maxim in the matters before the Securities and Exchange Commission. Although the director defendants were board members, they also held separate personal interests as defendants in the litigation. The Court held that the interests of the Special Committee investigating the allegations of wrongdoing were separate and different than the interests of the board member defendants, thus waiving the possible common or joint interest privilege. However, the Court further held that materials containing the opinions, thoughts and impressions of attorneys at Orrick might still be protected from discovery, and ordered that those materials be provided to the Court for further review and consideration.

The Court’s ruling should be a reminder that the attorney client and work product protections are not necessarily always absolute. Additionally, in appropriate circumstances a party may specifically decide to waive a privilege, and to produce protected information or documents to help prove that the board or committee member acted in good faith in satisfaction of his or her responsibilities and business judgment rule. So, be very careful about what you say and write, and about what your attorneys say and write, and to whom those matters are disclosed. It certainly appears strange that in Maxim confidential information was disclosed to the individual defendant directors and their counsel. Although the defendants also served as board members, service as a board member could not be separated from the fact that the person also was a defendant in the litigation that the Special Committee was investigating. And, the fact that an attorney or law firm served as legal counsel for Maxim could not necessarily be separated from the fact that the same legal counsel or firm also served as counsel for the individual defendants.

One additional issue of interest that the Court was not required to address: since the board did not give the Special Committee ultimate decision making authority, and the board retained that authority, how was the board going to exercise its decision making authority independent of the defendants who also were members of the board, and which board members would be the decision makers?

Dave Tate, CPA, Esq.
http://davidtate.us

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