Corporation Successfully Invokes Privilege Against Directors and Shareholders

The Massachusetts Supreme Judicial Court upheld a closely held corporation’s assertion of the attorney–client privilege over its litigation-related documents in a case involving board members’ direct and derivative claims against the company and other board members.  The Court ruled that the privilege protected these documents because the plaintiff-directors were sufficiently adverse to the corporation.  Chambers v. Gold Medal Bakery, Inc., 983 N.E.2d 683 (Mass. 2013).  You may access the opinion here.

Shareholder Derivative Claims

Two of Gold Medal Bakery, Inc.’s board members (and shareholders) sued the company and its other two board members. They alleged direct claims of breach of fiduciary duty as well as shareholder derivative claims that pertained to wrongful concealment of financial information and overall mismanagement.  This suit followed an earlier suit that settled, both of which had an implicit if not explicit goal of obtaining a favorable buyout of the plaintiff-directors’ shares.

Law Firm Subpoena and Special Master Decision

The plaintiff-directors subpoenaed all of Gold Medal’s corporate records from the company’s law firm.   The discovery special master overruled all privilege objections and ordered production of all documents. The Special Master reasoned that the law firm could not assert the privilege against directors or shareholders and that the plaintiff-directors and the company were effectively “joint clients” to which the privilege did not apply.

And, applying the Garner v. Wolfinbarger, 430 F.2d 1093 (CA5 1970) test, the court found that the plaintiffs-shareholders showed good cause why they should have access to the privileged communications.

The Appeal

On interlocutory appeal, the Supreme Court reversed and ruled that the attorney–client privilege protected discovery of corporate documents related to the two plaintiff-directors’ lawsuits.  The court first distinguished between privileged communications and general corporate financial records, stating that the privilege does not protect the latter.  The court noted that “inability to access legal advice provided to a corporation regarding a directors’ own litigation against a company is one thing; inability to access basic corporate information is quite another.”

The default rule is that directors have equal access to legal advice rendered to the corporation or other board members because all of them have responsibility for the company’s management.  But this default rule assumes that board members’ interests are not adverse to the company.  When the directors’ interests are adverse to the corporation, then the corporation “is entitled to receive legal advice in confidence and without having to share that advice with the director whose interests are adverse.”

There is no factor or set of factors that govern whether a board member’s interest is sufficiently adverse to preclude discovery of the company’s privileged communications.  The adverse-interest determination is necessarily a fact-specific question, and courts recognize that board members may have mixed interests, particularly when the case involves shareholder derivative claims.  But in Chambers, the court found that the plaintiff-directors’ interests relating to the two lawsuits, with at least partial aim at forcing a favorable buy-out, were sufficiently adverse to receive attorney–client privilege protection.