Corporate Attorney-Client Privilege Exception to Shareholders Under Garner
After a NY Times article alleged that Wal-Mart executives knew subsidiary Wal-Mex bribed Mexican government officials, a group of stockholders demanded to inspect documents related to the incident. Wal-Mart responded to the demand but declined to produce privileged material and highly redacted information from the documents it produced. IBEW filed a complaint in the Court of Chancery (Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust Fund IBEW, 2014 WL 3638848) pursuant to Corporations Code Section 220 (8 Del. C. §220) alleging deficiencies in Wal-Mart's production response. Eventually, IBEW informed the court that Wal-Mart failed to comply with a production order and the court held a Section 220 paper record trial. The court entered a final order requiring Wal-Mart to produce (1) officer level documents, whether they were provided to the Board of Directors or not, (2) documents spanning past the time frame in issue, (3) documents from Wal-Mart's disaster recovery tapes, and (4) responsive documents known to exist by the Office of General Counsel. The Court of Chancery also ordered production of documents subject to attorney-client and work-product privileges and granted Wal-Mart's motion to strike whistleblower documents IBEW obtained from an anonymous source. Both parties appealed to Delaware Supreme Court. Wal-Mart contended the order exceeded the scope of Section 220. Wal-Mart also argued the application of the Garner doctrine to privilege documents was improper. IBEW cross-appealed, arguing the court erred not ordering Wal-Mart to fix production deficiencies and by striking the whistleblower documents.
Under §220, the scope of production applies to documents that are "necessary and essential" to the shareholder's purpose and not available from other sources. Section 220(c) also grants the court discretion to limit or condition inspection. Wal-Mart challenged all production orders.
The Delaware Supreme Court held that Officer level documents could establish whether the directors had knowledge of the incident and addressed the stated purpose of whether the directors properly handled the situation. Wal-Mart's arguments against the time-span and disaster tapes were undermined by their prior responses; they had conceded to the time span previously and also admitted that the disaster recovery tapes contained responsive material. The Court rejected Wal-Mart's argument of vagueness and ambiguity against the fourth order and directed them to file a motion for clarification.
The Court then addressed the production of privileged documents. Wal-Mart claimed the Delaware Supreme Court never adopted the Garner doctrine from Garner v. Wolfinbarger (430 F.2d 1093), or alternatively, that it should not apply to a Section 220 claim. As recognized by the Fifth Circuit, the Garner doctrine provides a fiduciary exception to the attorney-client privilege upon a showing of good cause. Wal-Mart correctly asserted that the Delaware Supreme Court did not adopt Garner, but the Court of Chancery did. The Court also found good cause because IBEW were legitimate shareholders, the documents were otherwise unavailable, confidential information could be protected, and the allegations implicated criminal conduct. Wal-Mart argued the Court of Chancery improperly applied Garner to work-product, but the record reflected the work product ruling was properly based on Court of Chancery Rule 26(b)(3). Although Rule 26(b)(3) overlapped with Garner, the Court of Chancery did not err.
Finally, IBEW challenged the order to strike and return the whistleblower documents they received anonymously. The Court of Chancery inferred the documents were stolen from the anonymity of their source, but also allowed IBEW to re-acquire the documents through their demand and the Delaware Supreme Court affirmed the order.
Wal-Mart also attempted to challenge the scope of the order, but the Court rejected it. The Delaware Supreme Court affirmed the judgment.
BNSK partner Sara Colón is in the current issue of Los Angeles Lawyer Magazine
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