Morgans Hotels Group undertook a review of various strategic alternatives, striking a special committee of directors. Kalisman was one of the directors on that committee, but at a certain point he was frozen out of the committee's deliberations and told by other members that nothing was really happening. Au contraire: the other members of the special committee formulated a plan to recapitalise the company by transferring assets to a group of investors controlled by another Morgans director, in exchange for shares, warrants and a financial backstop for a rights offering. Kalisman found out about the plan on the eve of a special meeting of the full board, convened to approve the transactions. Kalisman objected to the adequacy of notice of the meeting but it went ahead anyway, and the recapitalisation plan was approved with only one vote against -- Kalisman's. He then went to court to block the transaction through a derivative action for breach of fiduciary duty, requesting production of the legal advice the company had received with respect to the proposed transactions. The company asserted attorney-client privilege.
No way, said Vice-Chancellor Alster of the Delaware Court of Chancery: Kalisman v Freidman (2013 Del Ch LEXIS 100). A director's right to information is 'essentially unfettered' and extends to privileged information provided to the company or its board. A company 'cannot pick and choose which directors get information by asserting the attorney-client privilege' against some but not all directors. There are only three exceptions to this rule: where (1) a director has agreed in advance to be excluded (although presumably not where this would hinder the director's ability to fulfil fiduciary duties); (2) a special committee has been appointed, with the knowledge of excluded directors, and retains its own legal counsel for the purposes of some special investigation or transaction (but presumably the special committee will not be able to shield information from non-committee directors once the committee's work is completed); and (3) sufficient adversity of interest exists between the corporation and the director, and the latter effectively ceases to be the client of the company's counsel. None of the three exceptions applied to privileged documents created before the crucial board meeting. Privilege could be asserted over documents prepared in the course of defending Kalisman's action.
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