December 21, 2021

Delaware Court Limits Former Directors' Access to Privileged Information

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Delaware's Chancery Court recently blocked two former directors from obtaining privileged communications between a corporation and its counsel in the context of the former directors' pursuit of personal claims against the entity.

Delaware has consistently held a director's access to information is "essentially unfettered," e.g. Kalisman v. Friedman (Del. Ch. Apr. 17, 2013). In SerVaas v. Ford Smart Mobility LLC (Del. Ch. Nov. 9, 2021), Vice Chancellor Lori W. Will noted three exceptions: (i) a contract limiting access; (ii) the existence of a special committee, of which the director is not a member, and which retains separate counsel; and (iii) and where "sufficient adversity exists between the director and the [entity] such that the director could no longer have a reasonable expectation that he was a client of the board's counsel." Op. at 6.

The SerVaas plaintiffs claimed they were wrongfully terminated shortly before deferred compensation rights were scheduled to vest, and sought discovery of all privileged documents from when they were directors. Explaining that "[a] director's right to information is ‘correlative with his duty to protect and preserve the corporation,'" the Court applied the third exception and held that granting plaintiffs access "to pursue personal breach of contract claims would be inconsistent with the purpose of director information rights." Op. at 7. The Court did not address whether "adversity" is determined as of the time of the director's service, or as of when the demand for access is made.

Ballard Spahr can help Delaware entities minimize the risk present or former directors who are adverse to the entity will invade the entity's attorney-client relationship. For assistance and more information, please contact our attorneys.

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