Attorney-Client Privilege Issues: Three Ways Companies Can Shield Privileged Communications From Their Directors

• A corporate director generally cannot obtain privileged corporate documents when that director has an improper purpose for obtaining the documents or is acting adversely to the company’s interests.
• In some jurisdictions, a company may be able to shield its privileged communications from a director by appointing a special committee to handle a dispute involving the director or with a prior agreement.

We previously explained how this broad access may allow current and former corporate directors to access privileged communications between a company and its attorneys—even during a dispute between the company’s directors.

In some instances it may be necessary for the company to shield privileged communications from a director. Many jurisdictions allow a company to withhold its privileged communications from a director if the company can show that the director has an improper purpose or is acting adversely to the company. A company may also be able to shield its privileged records from a director if the company’s board appoints a special committee to handle a dispute involving the director, or if the director preemptively agrees to limit their access to certain company records.

This post explains restrictions on a director’s right to access privileged company communications and offers three steps that companies can take to prevent directors from accessing those communications. (See our Solving Disputes series to learn more about attorney-client privileged communications and other common disputes among business owners and partners.)

Exceptions to a Director’s Right to Access Company Books and Records

In many jurisdictions—including Delaware, Illinois, Virginia, D.C., and Massachusetts—a director cannot obtain privileged company records where the director seeks them for an improper purpose.[1] Jurisdictions such as Delaware and Massachusetts also restrict a director’s access to privileged communications where the director is acting adversely to the company’s interests. Similarly, under California law, a director generally cannot obtain the company’s privileged communications relating to a lawsuit the director filed against the company.

Courts conduct a fact-intensive inquiry to determine whether a director has an improper purpose for inspection or is acting adversely to the company. That inquiry involves considering whether the company has specific evidence—beyond anticipating the director may sue the company—of an improper purpose or adversity.[2] For example, evidence that a director seeks to access privileged company records to harass the company or to force a buyout of the director’s shares at a premium may be sufficient to prevent the director from accessing those records.

Further, it is not sufficient for the company to show that the director is acting adversely to other directors. Instead, the company must show that the director is acting adversely to the company.[3]

Three Ways to Prevent Directors from Accessing Privileged Communications

Companies can act proactively to shield their privileged communications from a director where appropriate.

1. Ensure the engagement letter or other communications with counsel clearly describe the client and the matter, so all parties understand who the client is for purposes of attorney-client privilege.

If, for example, the engagement letter states that an attorney represents the company, then all directors may be able to access the company’s privileged communications with that attorney, subject to the exceptions described above. This is because corporate directors embody the company. If the engagement letter states instead that an attorney represents only certain specified directors, then other directors probably cannot access privileged communications between the client-directors and their attorney.

2. Before any dispute arises, consider entering into an agreement with the company’s directors that limits directors’ access to certain company records.

For example, if a shareholder agreement permits a shareholder to appoint a director, the company should consider including in that shareholder agreement a limit on that director’s access to information should a dispute arise between the director and the company. Any such agreement must allow the director sufficient access to the company records to fulfill their fiduciary duties.

3. As soon as a dispute arises, the board of directors should consider openly appointing a special committee to handle the dispute.

The special committee should consider retaining its own independent counsel in connection with the dispute. By taking these steps, the special committee can prevent any director who is not on the special committee from accessing the special committee’s privileged communications with its counsel.[4]

[1] Managers of LLCs generally have the same broad right of access to company records as corporate directors. Under Delaware law, a company can restrict an LLC Manager’s access to company records by showing that the Manager has an improper purpose and will use that privileged information in violation of the Manager’s fiduciary duties. See Obeid v. Gemini Real Estate Advisors, LLC, C.A. No. 2017-0510-JTL, 2018 WL 2714784, at *3 (Del. Ch. June 5, 2018).

[2] See Kalisman v. Friedman, C.A. No. 8447-VCL, 2013 WL 1668205, at *5–6 (Del. Ch. Apr. 17, 2013) (Delaware law); Chambers v. Gold Medal Bakery, Inc., 464 Mass. 383, 395 (2013) (Massachusetts law); Quinn v. Aechelon Tech., Inc., No. A127799, 2011 WL 1535402, at *4–5 (Cal. Ct. App. Apr. 25, 2011) (California law).

[3] See In re WeWork Litig., No. CV 2020-0258-AGB, 2020 WL 4917593, at *6–7 (Del. Ch. Aug. 21, 2020).

[4] See Moore Bus. Forms, Inc. v. Cordant Holdings Corp., No. 13911, 1996 WL 307444, at *6 (Del. Ch. June 4, 1996).