On a matter of first impression, the Delaware Court of Chancery (the Court) found in In re WeWork Litigation that corporate officers of a Delaware corporation may not unilaterally deny a director of a corporation access to communications with company counsel or outside counsel based on the premise that such communications are privileged.

Background

As noted in our prior alert, a special committee (Special Committee) of the board of directors (Board) of The We Company (WeWork) was formed on October 12, 2019 to evaluate a potential transaction with SoftBank Group Corp. and SoftBank Vision Fund (together, SoftBank).

The Special Committee negotiated a Master Transaction Agreement (MTA) entered into by SoftBank and WeWork on October 22, 2019, which contemplated a $3 billion tender offer for WeWork’s stock to be completed by SoftBank subject to certain closing conditions. The MTA resulted in SoftBank gaining the right to designate five of WeWork’s ten directors. SoftBank subsequently terminated the tender offer on April 1, 2020, asserting the failure of certain closing conditions, and the Special Committee caused WeWork to file suit against SoftBank, alleging that SoftBank breached its obligations under the MTA to use reasonable best efforts to consummate the tender offer as well as its fiduciary duties. WeWork’s putative controlling stockholder and SoftBank then sent a letter to the Board asserting that the Special Committee should not be permitted to continue the litigation. At the time, the Board consisted of eight directors, including four SoftBank designees and the two Special Committee members. On May 29, 2020, the Board, by vote of six to two (with the Special Committee directors voting against) to engage an executive search firm to identify two candidates for temporary appointment to the board for the purpose of forming a new, two-person committee (the “New Committee”) to determine if the Special Committee had the authority to cause WeWork to commence or continue the litigation.

The New Committee engaged its own counsel and determined that the Special Committee did not have such authority and instructed WeWork’s counsel to file a motion for leave to dismiss the litigation (the “Motion”) against SoftBank without prejudice. The Special Committee opposed the Motion and sought to discover communications among WeWork’s management, its in-house counsel and its outside counsel regarding under what circumstances the New Committee was established and how it may have been influenced by the Company’s corporate officers, including the Chief Executive Officer who had been chosen by SoftBank. Management opposed the requested discovery claiming that the communications were protected by the attorney-client or work product privileges.

The Court’s Analysis

The Court started its analysis by citing a basic premise under Delaware law that directors of Delaware corporations are generally entitled to unfettered access to legal advice received by the corporation during the director’s tenure. Citing Kalisman v. Friedman,[1] the Court stated that since corporations are managed by or under the direction of a board, directors should be treated as a joint client when legal advice is given to a corporation through one of its officers or directors.

The Court cited three limitations on this right that are recognized under Delaware law:

  1. A director’s rights may be diminished by contract;
  2. A board may appoint a special committee that would be entitled retain separate legal counsel, and the special committee’s communications with that counsel would be protected to the extent necessary for the committee’s work; and
  3. A board or committee may withhold privileged information once sufficient adversity exists between the directors and the corporation such that the directors could no longer have a reasonable expectation they were clients of the corporation’s counsel. We refer to this as the “Adversity Exception.”

Management invoked only the Adversity Exception to deny the Special Committee access to management’s communications with counsel regarding forming the New Committee. The Court noted that it was WeWork management, rather than its Board, that had decided to withhold privileged information from the Special Committee. The Court reasoned that the Adversity Exception did not apply since only a board or committee – rather than management – may invoke the Adversity Exception and withhold privileged information from directors. As a result, WeWork was directed to produce the requested privileged information to the Special Committee.

Key Takeaways

  • Directors of a Delaware corporation are entitled to virtually unfettered access to privileged communications with the corporation’s counsel unless one of the few exceptions applies. Corporate officers should assume that all communications with the corporation’s in-house counsel and outside counsel will be discoverable by all members of the board.
  • If a board appoints a special committee, the special committee is entitled to retain separate legal counsel, and the special committee’s privileged communications with that counsel would be protected to the extent necessary for the committee’s work.
  • If no special committee has been formed, then the board may withhold privileged information from directors if “sufficient adversity” exists between the directors and the corporation. The determination of “sufficient adversity” may only be made by the board, not by management. Only information relating to the adverse matter would be able to be withheld.

[1] Kalisman v. Friedman, 2013 WL 1668205 (Del. Ct. Ch.).

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Photo of Nancy B. Bostic Nancy B. Bostic

Nancy Bostic is the Practice Group Leader for Mergers and Acquisitions and Private Equity and also serves on Gray Reed’s CARES Act Task Force.

Photo of Grace G. Rollinger Grace G. Rollinger

Grace is a corporate lawyer committed to helping clients solve immediate business needs without losing sight of their long-term goals. Her practice is primarily focused on the negotiation and structuring of mergers and acquisitions, a variety of commercial agreements, entity formation, private equity…

Grace is a corporate lawyer committed to helping clients solve immediate business needs without losing sight of their long-term goals. Her practice is primarily focused on the negotiation and structuring of mergers and acquisitions, a variety of commercial agreements, entity formation, private equity offerings, and asset and stock sales.