What ar the Inspection Rights of a Director in Corporate-Conflict Situations?

In Kalisman v. Friedman, The Delaware Chancery Court recently rendered an interesting decision involving director-inspection rights and attorney-client privileges.

This is a very important area in business law and corporate governance, especially in cases where there are conflicts or even litigation between shareholders or directors over how to manage and operate the business of the corporation. Directors in control may deny the inspection rights of directors taking issue with the manner in which the corporation is being operated for fear that production of documents may fuel future claims.

Kalisman involved the efforts of a corporation to deny one of its directors access to information based on an assertion of the attorney-client privilege. During a dispute some of the documents requested were allegedly communications between one group of directors and their counsel. In analyzing this claim, the Delaware Chancery Court described the director demanding inspection as a “joint client of the subpoenaed law firms.” According to the decision, joint clients under Delaware law may not assert the privilege against one another.

If the client was based in California, the courts may have not reached the same decision. Under California law, a corporation is a person. A corporation’s confidential communications with its attorney are protected by the attorney-client privilege. Moreover, the attorney’s duty of loyalty is to the corporate entity. So if California law were applied, the decision to assert the privilege would most likely be held by a majority of the board.

The fact that a majority of a board has the power to assert or waive the privilege does not answer the question of whether the assertion of the privilege defeats a director’s “absolute” right of inspection.  In Wolf v. CDS Devco, the Fourth District Court of Appeal observed that a director could be denied the right to inspect corporate documents based on the director’s “potential adversary status to [the corporation],” as illustrated by the inspection request. This decision was backed by Tritek Telecom, Inc. v. Superior Court, which held that a director making inspection demands after filing a shareholder suit against the corporation has no right of inspection of attorney-client privileged documents generated in defense of the shareholder lawsuit.

Is California business law relative to inspection rights ever applicable to a Delaware corporation or director of a Delaware corporation involved in a dispute? The answer may be in the affirmative if the corporation either has its principal executive office in California or customarily holds meetings of its board in California.

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