Special Committees and Protecting Privilege

In Ryan, shareholders of Maxim Integrated Products, Inc. filed a derivative action naming several directors as defendants, alleging that they had breached their fiduciary duties by granting backdated stock options. Maxim's board formed a Special Committee, comprised of one independent director, to investigate the allegations, and the Special Committee engaged outside counsel to assist in the investigation. According to the court, counsel to the Committee conducted the investigation with the assistance of forensic accountants, and together they reviewed more than 300,000 documents and conducted in excess of thirty interviews of current and former employees, members of Maxim's board, and auditing partners of both accounting firms that audited Maxim's financial statements during the relevant time period.

At the conclusion of the investigation, the Special Committee and its counsel presented the final report, purportedly only orally, to Maxim's board. (The court expressed skepticism that no written report was prepared following such an extensive investigation.) In attendance at the board meeting were members of the board, attorneys from the Committee's counsel, and notably, attorneys who represented the director defendants in the derivative action.

According to the opinion, following the presentation, the board met on several occasions to deliberate and discuss actions in response to the Special Committee's findings and conclusions. Thereafter, Maxim publicly announced the results of the Special Committee's review, revealing that there had been certain 'deficiencies' related to the process for granting stock options, but otherwise publicly exonerated the directors from any wrongdoing or malfeasance. In a non-public report to NASDAQ, Maxim apparently provided more detail regarding the Special Committee's findings, including among other things that the investigation had discovered a number of misdated option grants between 1996 and 2006, which appeared to have been backdated to dates with lower prices.

According to the court, the Special Committee also concluded that Maxim's former CEO and current CFO had knowledge of and participated in the selection of grant dates either with hindsight or prior to completion of the formal grant-approval process. As a result of the investigation, the former CEO's employment as a part-time strategic adviser to the company was terminated, and the CFO's employment was also terminated.

Plaintiffs in the derivative action sought to compel discovery from Maxim and the counsel and forensic accountants advising the Special Committee of: 1) all communications between the outside firm and the Special Committee that occurred throughout the course of the investigation; 2) the firm's presentation of the final report to the Special Committee and to Maxim's board of directors; and 3) the firm's investigation materials, including notes of interviews and the firm's forensic analysis of Maxim's computer systems. Both Maxim and the outside firm asserted the attorney-client privilege to the communications and the presentation, and the firm asserted the work product protection over its investigation materials.

In November 2007, the court issued an order compelling Maxim and the outside firm to produce the requested communications. (The court deferred ruling on work product issues until a later date.) In January 2008, the court rejected Maxim's motion for certification of an interlocutory appeal and further clarified its November ruling.

The Garner Doctrine

The court ruled that the attorney-client privilege did not apply as against the plaintiffs in the derivative action pursuant to the fiduciary exception established in Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970). In Ryan, the court found plaintiff shareholders had shown good cause under the Garner framework and could obtain discovery of the firm's communications. Specifically, plaintiffs had demonstrated: 1) a colorable claim; 2) the unavailability of information from other sources, including the lack of a written final report, and the unavailability of witnesses due to invocation of the Fifth Amendment privilege not to testify; and 3) specificity in identifying requested information. (For a detailed discussion of the Garner doctrine see David M. Greenwald, et al., Testimonial Privileges, ' 1:37 (Thomson West 2005) (update through 2007).)

In addition, the court ruled that, even if Maxim and the Special Committee shared a joint privilege, an issue that the court did not decide, Maxim had waived the privilege in several ways. First, the privilege was waived when the Special Committee disclosed its report at a board meeting attended by defendant directors, and their personal attorneys. The court concluded that the presence of the directors' personal attorneys demonstrated that the directors were attending the meeting in their personal and potentially adversarial capacities, and not in their fiduciary capacities. Disclosure of privileged communications to third parties generally waives the privilege, and the directors, who were found to be acting in their personal rather than fiduciary capacities, were deemed third parties who fell outside the privilege. Second, Maxim had waived the privilege by disclosing the report's conclusions to the public and to NASDAQ, and by relying on the report in its motion to dismiss.

Lessons Learned

For those who find themselves in a similar situation, what lessons can be derived from the Ryan decisions? On the one hand, Ryan can be synthesized with existing privilege doctrine. The court goes to great lengths to emphasize that its decision is based on the well-accepted principle that communications made in the presence of third persons not for the purpose of seeking legal advice operates as a waiver of the privilege. The fact that the foregoing rule had apparently never been applied to these particular facts was not of great consequence to the court.

The existing privilege doctrine does provide for considerable protection. Practitioners can take comfort from the fact that although there is little case law on the issue, courts should acknowledge a privilege between a special committee or an audit committee and its separately retained counsel. In In re BCE West LP, 2000 WL 1239117, at *2 (S.D.N.Y. 2000), the court stated: 'It is counterintuitive to think that while the Board permitted the Special Committee to retain its own counsel, the Special Committee would not have the benefit of the attorney-client privilege inherent in that relationship or that the Board of Directors or management, instead of the Special Committee, would have control of such privilege.' See also Ryan, 2007 WL 4259557, at *3 ('There appears to be no dispute that, absent waiver or good cause, the attorney-client privilege protects communications between [outside counsel] and its client, the Special Committee.')

It is still possible to protect appropriate committee communications via the attorney-client privilege.

If the goal of the company is to preserve privilege over a report and investigation by a special committee, the company should refrain from disclosing the substance of the investigation report or its conclusions, except in the most general terms, in public statements or in submissions to government regulators. Companies should also be careful not to put an investigation 'at issue' in litigation by relying on the investigation as evidence of good faith or otherwise making affirmative use of the report or its conclusions. Of course if the report is particularly helpful, a company may always choose to disclose it, but at the price of waiving otherwise applicable privileges.

Although it is also true that the Garner doctrine will always be a potential impediment to asserting the attorney-client privilege in derivative actions and other fiduciary contexts, most jurisdictions do not apply the Garner doctrine to work product. For this and other reasons, it is important to assert the work product protection whenever it would otherwise be appropriate to do so.

The Caveat

Ryan does not stand for the proposition that all disclosures of committee reports to the board of directors will result in a waiver of the privilege.

The court in Ryan made it clear that it was the presence of director defendants (together with their counsel) attending the board meeting in their individual and potentially adversarial capacity, rather than as fiduciaries, that led to a finding of waiver. The court stated that '[t]he decision would not apply to a situation ' in which board members are found to be acting in their fiduciary capacity, where their personal lawyers are not present ” Other courts agree that disclosing special committee reports to the board does not automatically waive privilege. See In re BCE West LP, 2007 WL 1239117, at *2 (communications with the Board 'were part of the transaction process' and did not destroy the special committee's privilege); Picard Chemical, Inc. Profit Sharing Plan v. Perrigo Co., 951 F. Supp. 679, 689 (W.D. Mich. 1996) (disclosure of special litigation committee's report to the Board did not waive privilege).

However, one should nonetheless exercise caution when disclosing a report to any third party with an adverse interest ' including a director.

The adversarial nature of the relationship between the director defendants and Maxim was obviously of paramount concern to the court. If you are involved in an investigation where the directors of the board are actual or potential defendants, consider the risks attendant with sharing the results of the investigation with those individuals (and their counsel). Similarly, take caution when sharing with any third party the results of any investigation. (Although beyond the scope of this article, it is important to note that disclosure to the company's auditors at such a presentation could also lead to waiver of the attorney-client privilege. See Testimonial Privileges, ' 3:5.)

Finally, consider the possibility that 'bad facts make bad law.'

Conclusion

The Ryan opinions seem to suggest that various aspects of the Special Committee process were troubling to the court. Single-member special committees often seem to be fraught with peril, particularly where those committees engage in purportedly extensive fact-finding exercises consisting of voluminous document collection and review, only to then render an oral report when their investigation is complete. When the findings of that report then seem inconsistent with the company's public statements, the risks of finding an unsympathetic court presumably increase.

In short, while Ryan applies existing waiver concepts to an admittedly unique set of circumstances, practitioners should exercise caution, rather than panic. While care must be taken to insure that any privileges are not waived inadvertently, the mere reporting by a committee to a board of directors will not automatically result in the loss of the attorney-client privilege.

Thaddeus J. Malik ([email protected]) and David M. Greenwald ([email protected]) are partners in Jenner & Block's Chicago office. Malik is a member of the Corporate Practice and Co-Chair of the Mergers & Acquisitions Practice. Greenwald is Co-Chair of the firm's Reinsurance Practice, and a member of the Litigation Department and Insurance Litigation and Counseling, Government Contracts Practices, and White Collar Criminal Defense and Counseling. Mercedes M. Davis is an associate and a member of the firm's Corporate Practice.

Your company receives an allegation of serious wrongdoing involving a current board member. After an initial review and perhaps a discussion with the chair of your Audit Committee, it is agreed that the matter cannot be dismissed out of hand and should be elevated to the board of directors. After a meeting and discussion by the independent and non-conflicted directors, a decision is made to form a special committee to fully investigate the matter. That committee is formed, retains its own outside advisers, and commences its investigation. During that investigation, the committee interviews employees and reviews internal documents, taking care to maximize the protections afforded by the attorney-client privilege and the work product doctrine as well. After the investigation is completed and the committee has reached its conclusions, it is now time for the committee to present its findings to the remaining directors so that appropriate steps can be taken to respond to any confirmed wrongdoing. The question then becomes how the board can discharge its fiduciary duties without waiving otherwise applicable privileges to the investigation and opening the door to discovery of investigation related materials by the government or by third party litigation adversaries.

Ryan v. Gifford

Two recent unpublished opinions issued by the Delaware Chancery Court shed some light on the analysis, and also offer a cautionary tale. In Ryan v. Gifford, Civ. Action No. 2213-CC, the court specifically addresses the privilege issue in the context of a shareholder derivative action. 2007 WL 4259557 (Del. Ch. Nov. 30, 2007) ('Ryan I'); 2008 WL 43699 (Del. Ch. Jan. 2, 2008) ('Ryan II'). In particular, the court identified several actions that may put privilege in jeopardy.

In Ryan, shareholders of Maxim Integrated Products, Inc. filed a derivative action naming several directors as defendants, alleging that they had breached their fiduciary duties by granting backdated stock options. Maxim's board formed a Special Committee, comprised of one independent director, to investigate the allegations, and the Special Committee engaged outside counsel to assist in the investigation. According to the court, counsel to the Committee conducted the investigation with the assistance of forensic accountants, and together they reviewed more than 300,000 documents and conducted in excess of thirty interviews of current and former employees, members of Maxim's board, and auditing partners of both accounting firms that audited Maxim's financial statements during the relevant time period.

At the conclusion of the investigation, the Special Committee and its counsel presented the final report, purportedly only orally, to Maxim's board. (The court expressed skepticism that no written report was prepared following such an extensive investigation.) In attendance at the board meeting were members of the board, attorneys from the Committee's counsel, and notably, attorneys who represented the director defendants in the derivative action.

According to the opinion, following the presentation, the board met on several occasions to deliberate and discuss actions in response to the Special Committee's findings and conclusions. Thereafter, Maxim publicly announced the results of the Special Committee's review, revealing that there had been certain 'deficiencies' related to the process for granting stock options, but otherwise publicly exonerated the directors from any wrongdoing or malfeasance. In a non-public report to NASDAQ, Maxim apparently provided more detail regarding the Special Committee's findings, including among other things that the investigation had discovered a number of misdated option grants between 1996 and 2006, which appeared to have been backdated to dates with lower prices.

According to the court, the Special Committee also concluded that Maxim's former CEO and current CFO had knowledge of and participated in the selection of grant dates either with hindsight or prior to completion of the formal grant-approval process. As a result of the investigation, the former CEO's employment as a part-time strategic adviser to the company was terminated, and the CFO's employment was also terminated.

Plaintiffs in the derivative action sought to compel discovery from Maxim and the counsel and forensic accountants advising the Special Committee of: 1) all communications between the outside firm and the Special Committee that occurred throughout the course of the investigation; 2) the firm's presentation of the final report to the Special Committee and to Maxim's board of directors; and 3) the firm's investigation materials, including notes of interviews and the firm's forensic analysis of Maxim's computer systems. Both Maxim and the outside firm asserted the attorney-client privilege to the communications and the presentation, and the firm asserted the work product protection over its investigation materials.

In November 2007, the court issued an order compelling Maxim and the outside firm to produce the requested communications. (The court deferred ruling on work product issues until a later date.) In January 2008, the court rejected Maxim's motion for certification of an interlocutory appeal and further clarified its November ruling.

The Garner Doctrine

The court ruled that the attorney-client privilege did not apply as against the plaintiffs in the derivative action pursuant to the fiduciary exception established in Garner v. Wolfinbarger , 430 F.2d 1093 (5th Cir. 1970). In Ryan, the court found plaintiff shareholders had shown good cause under the Garner framework and could obtain discovery of the firm's communications. Specifically, plaintiffs had demonstrated: 1) a colorable claim; 2) the unavailability of information from other sources, including the lack of a written final report, and the unavailability of witnesses due to invocation of the Fifth Amendment privilege not to testify; and 3) specificity in identifying requested information. (For a detailed discussion of the Garner doctrine see David M. Greenwald, et al., Testimonial Privileges, ' 1:37 (Thomson West 2005) (update through 2007).)

In addition, the court ruled that, even if Maxim and the Special Committee shared a joint privilege, an issue that the court did not decide, Maxim had waived the privilege in several ways. First, the privilege was waived when the Special Committee disclosed its report at a board meeting attended by defendant directors, and their personal attorneys. The court concluded that the presence of the directors' personal attorneys demonstrated that the directors were attending the meeting in their personal and potentially adversarial capacities, and not in their fiduciary capacities. Disclosure of privileged communications to third parties generally waives the privilege, and the directors, who were found to be acting in their personal rather than fiduciary capacities, were deemed third parties who fell outside the privilege. Second, Maxim had waived the privilege by disclosing the report's conclusions to the public and to NASDAQ, and by relying on the report in its motion to dismiss.

Lessons Learned

For those who find themselves in a similar situation, what lessons can be derived from the Ryan decisions? On the one hand, Ryan can be synthesized with existing privilege doctrine. The court goes to great lengths to emphasize that its decision is based on the well-accepted principle that communications made in the presence of third persons not for the purpose of seeking legal advice operates as a waiver of the privilege. The fact that the foregoing rule had apparently never been applied to these particular facts was not of great consequence to the court.

The existing privilege doctrine does provide for considerable protection. Practitioners can take comfort from the fact that although there is little case law on the issue, courts should acknowledge a privilege between a special committee or an audit committee and its separately retained counsel. In In re BCE West LP, 2000 WL 1239117, at *2 (S.D.N.Y. 2000), the court stated: 'It is counterintuitive to think that while the Board permitted the Special Committee to retain its own counsel, the Special Committee would not have the benefit of the attorney-client privilege inherent in that relationship or that the Board of Directors or management, instead of the Special Committee, would have control of such privilege.' See also Ryan, 2007 WL 4259557, at *3 ('There appears to be no dispute that, absent waiver or good cause, the attorney-client privilege protects communications between [outside counsel] and its client, the Special Committee.')

It is still possible to protect appropriate committee communications via the attorney-client privilege.

If the goal of the company is to preserve privilege over a report and investigation by a special committee, the company should refrain from disclosing the substance of the investigation report or its conclusions, except in the most general terms, in public statements or in submissions to government regulators. Companies should also be careful not to put an investigation 'at issue' in litigation by relying on the investigation as evidence of good faith or otherwise making affirmative use of the report or its conclusions. Of course if the report is particularly helpful, a company may always choose to disclose it, but at the price of waiving otherwise applicable privileges.

Although it is also true that the Garner doctrine will always be a potential impediment to asserting the attorney-client privilege in derivative actions and other fiduciary contexts, most jurisdictions do not apply the Garner doctrine to work product. For this and other reasons, it is important to assert the work product protection whenever it would otherwise be appropriate to do so.

The Caveat

Ryan does not stand for the proposition that all disclosures of committee reports to the board of directors will result in a waiver of the privilege.

The court in Ryan made it clear that it was the presence of director defendants (together with their counsel) attending the board meeting in their individual and potentially adversarial capacity, rather than as fiduciaries, that led to a finding of waiver. The court stated that '[t]he decision would not apply to a situation ' in which board members are found to be acting in their fiduciary capacity, where their personal lawyers are not present ” Other courts agree that disclosing special committee reports to the board does not automatically waive privilege. See In re BCE West LP, 2007 WL 1239117, at *2 (communications with the Board 'were part of the transaction process' and did not destroy the special committee's privilege); Picard Chemical, Inc. Profit Sharing Plan v. Perrigo Co. , 951 F. Supp. 679, 689 (W.D. Mich. 1996) (disclosure of special litigation committee's report to the Board did not waive privilege).

However, one should nonetheless exercise caution when disclosing a report to any third party with an adverse interest ' including a director.

The adversarial nature of the relationship between the director defendants and Maxim was obviously of paramount concern to the court. If you are involved in an investigation where the directors of the board are actual or potential defendants, consider the risks attendant with sharing the results of the investigation with those individuals (and their counsel). Similarly, take caution when sharing with any third party the results of any investigation. (Although beyond the scope of this article, it is important to note that disclosure to the company's auditors at such a presentation could also lead to waiver of the attorney-client privilege. See Testimonial Privileges, ' 3:5.)

Finally, consider the possibility that 'bad facts make bad law.'

Conclusion

The Ryan opinions seem to suggest that various aspects of the Special Committee process were troubling to the court. Single-member special committees often seem to be fraught with peril, particularly where those committees engage in purportedly extensive fact-finding exercises consisting of voluminous document collection and review, only to then render an oral report when their investigation is complete. When the findings of that report then seem inconsistent with the company's public statements, the risks of finding an unsympathetic court presumably increase.

In short, while Ryan applies existing waiver concepts to an admittedly unique set of circumstances, practitioners should exercise caution, rather than panic. While care must be taken to insure that any privileges are not waived inadvertently, the mere reporting by a committee to a board of directors will not automatically result in the loss of the attorney-client privilege.

Thaddeus J. Malik ([email protected]) and David M. Greenwald ([email protected]) are partners in Jenner & Block's Chicago office. Malik is a member of the Corporate Practice and Co-Chair of the Mergers & Acquisitions Practice. Greenwald is Co-Chair of the firm's Reinsurance Practice, and a member of the Litigation Department and Insurance Litigation and Counseling, Government Contracts Practices, and White Collar Criminal Defense and Counseling. Mercedes M. Davis is an associate and a member of the firm's Corporate Practice.