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In Merger- Related Suit, Attorney-Client Privilege Prevailed Over Garner Challenge

In Salberg v. Genworth Financial, Inc., C.A. No. 2017-0018-JRS (Del. Ch. July 27, 2017), the Delaware Court of Chancery denied the demand by the plaintiff stockholders (the “Stockholders”) for books and records from defendant Genworth Financial, Inc. (“Genworth”) under Section 220 of the Delaware General Corporation Law.  Genworth asserted the attorney-client privilege and the Stockholders sought to invoke the “celebrated” Garner fiduciary exception.  While the § 220 demand was made in the context of a pending merger, influential to the ruling was the fact that the requested books and records were relevant to a separate derivative action among the same parties.  Although most of the Garner “good cause” factors weighed in favor of an exception to the privilege, the court held that the unique facts and circumstances surrounding the Stockholders’ demand barred them from accessing privileged information that was shielded from discovery in the derivative suit.

The Stockholders filed a derivative suit against Genworth, alleging directors and officers breached their fiduciary duties. During the pendency of the derivative suit, Genworth announced it had agreed to be acquired in a merger.  Shortly thereafter, the Stockholders made a § 220 demand on Genworth for books and records to evaluate potential direct claims related to the merger, specifically whether and how the Genworth board considered the Stockholders’ derivative claims in negotiating the consideration for the merger.  Genworth responded by producing approximately 700 pages of board minutes and internal valuation materials, most of which were heavily redacted based on assertions of attorney-client privilege.  Invoking the Garner fiduciary exception, the Stockholders moved for an order compelling Genworth to produce unredacted copies.  Genworth opposed the motion, arguing that the Stockholders failed to show “good cause” to claim the fiduciary exception and overcome the attorney-client privilege.

Rejecting the § 220 demand, the court held that the facts and circumstances did not warrant unredacted production of the privileged materials under Garner.  All parties agreed that the Stockholders had precisely identified the documents at issue and thus were not blindly fishing and that the Stockholders did not have other sources from which the sought-after information could be obtained.  Rather, the dispute and the court’s analysis focused on two of the nine Garner factors—(1) whether the Stockholders made a colorable claim and (2) whether the privileged communications reflected advice concerning the litigation itself.

On the first factor, the court held the Stockholders made a colorable claim that Genworth’s directors and officers breached their fiduciary duties in evaluating the Stockholders’ derivative claims when considering the merger. The court rejected Genworth’s Corwin-based defense that a fully informed and uncoerced vote to approve the merger would cleanse the Stockholders’ price and process claims.  Instead, applying the “credible basis” standard normally applied in these situations, the court held the Stockholders’ serious allegations of systemic fraud in two business lines was a credible basis from which the court could infer possible wrongdoing in connection with the board’s consideration of the derivative claims and the merger.

On the second factor, the court recognized the litigation to which the privileged communications directly related was the derivative action, not the breach of fiduciary duty claims Stockholders contemplated through the present § 220 demand action. However, the court noted the Stockholders were represented by the same counsel in both the demand action and the derivative action and found that Stockholders initiated the demand action to gain access to what it could not achieve through discovery in the derivative suit, i.e., a review of the mental impressions and assessments of Genworth and its counsel regarding the strength and weaknesses of Stockholders’ derivative claims.  The court noted the Genworth board was understandably concerned that production of such materials in the demand action would give Stockholders an unfair advantage in the derivative action.

The final consideration relevant to the court’s analysis was the timing of the Stockholders’ claims as relating to the closing of the merger and related federal securities litigation involving the parties. All parties expected the merger to close in the near future, which led the court to conclude that the more prudential disposition was to wait to see if the merger closed before determining whether Genworth’s privileged impressions should be produced to the Stockholders. If the merger closed and the derivative action ended due to the Stockholders’ lack of standing, the Stockholders would have ample time to investigate any direct claims related to the merger.  If the merger did not close, then there would be no basis under § 220 to force Genworth in the derivative action to produce privileged materials regarding the merits of the claims.  The Stockholders argued that there was an urgent demand for the privileged information so they could oppose a proposed settlement in the ongoing securities litigation; however, the court accepted Genworth’s concession that any settlement of that litigation would not affect the Stockholders’ potential direct claims challenging the merger.  On balance, the court held that these circumstances did not amount to good cause, at the time, for the Stockholders to overcome the attorney-client privilege and inspect unredacted books and records under the Garner fiduciary exception.

Salberg v. Genworth Financial, Inc., C.A. No. 2017-0018-JRS (Del. Ch. July 27, 2017)

Copyright 2017 K & L Gates

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About this Author

Kevin Stitcher, Corporate Attorney, Transactions, KL Gates Law Firm
Partner

Mr. Stichter is a partner in the Charlotte office. His practice focuses on corporate transactions, such as mergers and acquisitions, private equity, venture capital, and equity and debt financings. He is often involved in cross-border transactions, involving parties and operations in multiple countries and related international issues. He also advises clients on general corporate matters, corporate governance and commercial contracts. In addition, he serves as outside general counsel to various companies.

704.331.7582
Associate

Nathan Harrill is an associate in the Raleigh office.

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