Recent Restatement On Scope Of Director Sharing Of Company Information

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Taft Stettinius & Hollister
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Delaware Chancery Court letter opinions are sources of excellent treatments of discrete legal issues that are often the subject matter of recurring practical client questions.
United States Corporate/Commercial Law
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Delaware Chancery Court letter opinions are sources of excellent treatments of discrete legal issues that are often the subject matter of recurring practical client questions. In Icahn Partners LP v. DeSouza,1 the court provided a useful restatement on the limits of sharing of a company's privileged and confidential information by a director with a company stockholder.

In this case, Illumina (Company), as nominal defendant, filed a motion to strike certain allegations set forth in a confidentially filed complaint for direct and derivative claims for breach of fiduciary duties that were derived from privileged or confidential information delivered to the plaintiffs by a Company board member.

The stockholder plaintiffs were three entities controlled by Carl Icahn. They controlled approximately 1.4% of the Company's common stock and submitted a slate of three directors challenging the Company's board nominees, one of which (Director) was elected to the Company's board. The Director was an employee of a fourth Icahn controlled affiliate.

Prior to the Director's election, the plaintiffs submitted a DGCL Section 220 books and records request, to which the Company responded with an offer to produce non-privileged documents on a confidential basis. The plaintiffs never responded to the offer and later filed the complaint.

The Director had agreed to abide by the Company's code of conduct in connection with his service, which required that the Director not supply trade secrets or other confidential information to third parties except as required to properly perform his duties. In connection with that service, the Director received privileged and confidential Company information regarding matters occurring prior to the Director's board service, some of which was utilized in drafting the complaint.

The court provided a useful distillation of case law and academic treatment of the issues:

  • Directors have broad rights to company information.
  • Directors may be entitled to access legal advice provided to a board before their service if they have a present need for it to discharge their fiduciary duties.
  • Directors are entitled to privileged communications delivered to the company or its board, subject to well recognized exceptions2.
  • Directors may share privileged communications with their designating stockholders where:
    • The stockholder has the right to designate the director by contract or voting power; or
    • The director serves in a controller or fiduciary capacity with the stockholder.

It was undisputed that the plaintiffs had neither a contractual right to appoint the Director nor a controlling vote regarding the Director's election and that the Director did not serve as a fiduciary of any of the plaintiffs.

The court dismissed the plaintiffs' argument that the combination of their nomination of Director and the Director's employment by a separate Icahn controlled affiliate negated any reasonable expectation of confidentiality between them and the Company. In the court's view, his mere appointment does not satisfy the standard, and his agreement to observe the Company's code of conduct made it unreasonable for him to think he was entitled to share Company privileged information with the plaintiffs.

The court finally noted in passing that the Company was persuasive in arguing that not striking the portions of the complaint derived from its privileged and confidential information would effectively reward plaintiffs with an end run of the DGCL Section 220 process in which they had not meaningfully participated.

Since the Director's manner of appointment and relationship with the plaintiffs did not meet the standard, the court granted the Company's motion to strike.

Like other Delaware Chancery Court letter opinions, Icahn Partners provides practical nuggets worthy of inclusion in any fund or company director handbook or a company's code of conduct to assist in answering recurring board service questions.

Footnotes

1. Icahn Partners LP v. Francis DeSouza, C.A. No. 2023-1045-PAF (2024 Del. Ch. LEXIS 92, Jan. 16, 2024).

2. These would include (i) pre-existing agreements limiting access, (ii) limitations in connection with special committee matters, and (iii) existing adversity between the director and the company.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Recent Restatement On Scope Of Director Sharing Of Company Information

United States Corporate/Commercial Law
Contributor
Established in 1885, Taft is a nationally recognized law firm serving individuals and businesses worldwide, in both mature and emerging industries.
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