A&O Shearman | M&A and Corporate Governance Litigation Blog | Delaware Chancery Court Holds <em >Garner</em > Fiduciary Exception Does Not Justify Compelled Production Of Privileged Documents Relevant To A Derivative Litigation In Response To A Section 220 Demand Brought By The Same Plaintiffs<br >  
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  • Delaware Chancery Court Holds Garner Fiduciary Exception Does Not Justify Compelled Production Of Privileged Documents Relevant To A Derivative Litigation In Response To A Section 220 Demand Brought By The Same Plaintiffs

    On July 27, 2017, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery found that stockholder plaintiffs had not satisfied their burden of showing “good cause” under the Garner fiduciary exception to the attorney-client privilege doctrine to require defendant Genworth Financial, Inc. (“Genworth”) to produce privileged communications in response to a books and records demand.  Salberg v. Genworth Fin., Inc., C.A. No. 2017-0018-JRS (Del. Ch. July 27, 2017).  The demand under Section 220 of the Delaware General Corporation Law, 8 Del. C. § 220, sought documents relating to the same plaintiffs’ claims in a separate derivative action against Genworth’s directors and officers.  The Court held that the Garner exception did not require Genworth to produce the privileged communications during the pendency of the derivative action, because the communications related to the “bona fides” of plaintiffs’ claims in that action.

    Plaintiffs are Genworth stockholders.  Approximately one year before asserting the Section 220 demand, plaintiffs, represented by the same counsel, filed a derivative complaint against Genworth’s directors and officers relating to alleged false and misleading statements about the company’s long-term care insurance business.  During the pendency of the derivative action, Genworth announced that it would be acquired by another company in an all-cash transaction.  According to the Court, the transaction is expected to close during the summer or fall pending regulatory approval.

    Shortly after the announcement of the merger, plaintiffs made this Section 220 demand for books and records that plaintiffs believed would reflect whether Genworth’s board considered the value of plaintiffs’ derivative claims in negotiating the merger consideration.  In response, Genworth produced certain board minutes and materials in redacted format to protect its assertions of attorney-client privilege.

    The sole issue at the “trial” on a stipulated paper record was whether the Garner fiduciary exception should require Genworth to produce the privileged documents without redactions.  The exception “recognizes that ‘where the corporation is in suit against its stockholders on charges of acting inimically to stockholder interests, protection of those interests as well as those of the corporation and of the public require that the availability of the privilege be subject to the right of the stockholders to show ‘good cause’ why the privilege should not apply.’”  Grimes v. DSC Commc’ns Corp., 724 A.2d 561, 568 (Del. Ch. 1998) (citing Garner v. Wolfinbarger, 430 F.2d 1093, 1103-04 (5th Cir. 1970)). 

    Rejecting the books and records demand, the Court highlighted that it “seeks information directly related to separate claims [plaintiffs] are actively litigating against the parties who have invoked the privilege.”  The Court concluded that plaintiffs failed to show good cause “at this time,” because there was “no reason . . . not to wait to see what happens with the [m]erger.”  If the merger closes, and the derivative action is extinguished because plaintiffs will no longer be stockholders, then plaintiffs would have “ample time” to “discover whether the Genworth board adequately considered the value of the derivative claims when negotiating merger consideration should they choose to bring direct claims relating to the [m]erger.”  If the merger does not close, “then there will be no basis under Section 220 or otherwise to compel the defendants in the [d]erivative [a]ction to produce to their adversary the privileged communications” regarding “the bona fides of the claims they are defending.”

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