A common yet often unresolved question in shareholder derivative actions is whether the company may assert the attorney–client privilege against its own plaintiff–shareholders. Under federal law, the leading case is Garner v. Wolfinbarger, 430 F.2d 1093 (CA5 1970), where the 5th Circuit created a privilege exception if the shareholders could show good cause for not invoking it.
Now, Pennsylvania has adopted the Garner exception, holding that trial courts should evaluate certain criteria to determine whether “good cause” exists to not apply the attorney–client privilege to plaintiffs in derivative actions. Pittsburgh History & Landmark Found., 2017 WL 1422894 (Pa. Commonw. Ct. Apr. 21, 2017). You may read the decision here.
Pennsylvania trial judges play an initial gatekeeper role in derivative actions where they examine whether the business-judgment rule applies to preclude the entire action. In Cuker v. Mikalauskas, 692 A.2d 1042 (Pa. 1997), the Penn. Sup. Ct. adopted the gatekeeping procedure set forth in the ALI’s Principles of Corporate Governance: Analysis and Recommendations (1994).
This process includes permitting the corporation to conduct an internal investigation and submit its written findings/report as part of a motion to dismiss the derivative action. The corporation must supply the report and supporting documentation, including legal opinions, to the plaintiff–shareholders.
Discovery & Privilege
The ALI and Cuker permit limited discovery to enable parties to make complete arguments whether the business-judgment rule applies in a particular case, and the issue quickly arises whether the plaintiff–shareholders may discover documents otherwise protected by the corporation’s attorney–client privilege.
The ALI and Cuker require the corporation to furnish its legal opinions to plaintiff’s counsel if the corporation tenders those opinions to the court as part of any motion to dismiss. The attorney–client privilege and work-product doctrine, however, continue to protect communications between the corporation and its counsel—in other words, the corporation does not waive the privilege by disclosing its legal opinions to the court. ALI § 7.13(e).
In Pittsburgh History, the appellate court had to assess whether the plaintiff–shareholders could discover certain attorney–client communications prior to responding to the corporation’s motion to dismiss. The court noted that the ALI’s comment to §7.13(e) “describes a potential exception to the attorney–client privilege when an action is derivative.”
And it noted that §85 of the Restatement (Third) of the Law Governing Lawyers permits plaintiff–shareholders to discover privileged communications in certain circumstances.
Based on these legal publications, and that Cuker adopted the ALI’s procedures, the Pittsburgh History court adopted the Garner privilege exception to the corporate attorney–client privilege and held this—
In shareholder derivative actions, the corporation’s attorney–client privilege is subject to the shareholder’s right to show “good cause” why the corporation should not invoke the privilege. Trial courts should evaluate certain criteria to determine whether “good cause” exists, including this non-exhaustive list:
- The number of shareholders and the percentage of stock they represent;
- The bona fides of the shareholders;
- The nature of the shareholders’ claim and whether it is obviously colorable;
- The apparent necessity or desirability of the shareholders having the information and the availability of it from other sources;
- Whether, if the shareholders’ claim is of wrongful action by the corporation, it is of action criminal, or illegal but not criminal, or of doubtful legality;
- Whether the communication related to past or to prospective actions;
- Whether the communication is of advice concerning the litigation itself;
- The extent to which the communication is identified versus the extent to which the shareholders are blindly fishing; and
- The risk of revelation of trade secrets or other information in whose confidentiality the corporation has an interest for independent reasons.
Garner, 430 F.2d at 1104.
The Court, however, cautioned that the Garner exception is a limited one. The court should limit disclosure to privileged communications that were “roughly contemporaneous with the events giving rise to the litigation.” Moreover, “post-event attorney–client privilege communications, particularly those communications advising with respect to pending litigation, are probably not discoverable.”