Those with ownership stakes in privately held businesses, partnerships, or family offices need to closely collaborate with and trust others. When disagreements and disputes over rights and responsibilities arise, individual emotions and personalities can complicate matters. This ongoing series will help owners anticipate potential problems when structuring their businesses and find solutions to issues that commonly arise among owners of privately held businesses, both before and during litigation.

Consider this scenario: the directors of ABC, Inc. are choosing sides over control of the company, although no director has sued any other director or the company yet. John is one of ABC’s directors. He wants to review emails between other board members and ABC’s attorneys discussing the battle for control. Can a majority of ABC’s directors withhold these privileged communications from John?

• Corporate directors generally have broad access to inspect corporate books and records, including privileged communications between the company and its attorneys.

• In many jurisdictions, directors, and sometimes former directors, may be able to obtain otherwise-privileged corporate records during a dispute with the rest of the board or with the corporation.

Generally, a majority of a corporation’s directors cannot withhold privileged communications from other directors. Corporate directors have the right, subject to certain exceptions, to inspect all company books and records, including records containing privileged communications with the company’s attorneys. (Our next post will explain these exceptions and how companies can prevent a director from obtaining privileged records. See our Solving Disputes series to learn more about attorney-client privileged communications and other common disputes among business owners and partners.)

Now consider a situation where the rest of ABC’s board of directors voted to remove Jane as a director. After removal, Jane wants to access emails between the board and its attorneys. Can Jane access these privileged communications even though she is no longer a director? In most jurisdictions, she likely cannot. But in some jurisdictions, including in Delaware, Jane may be able to access the privileged communications if they existed when Jane was a director.

This post explains how corporate directors may be able to access privileged corporate records under the laws of different jurisdictions.

Current Directors Generally May Access the Company’s Privileged Records

By statute or common law, the general rule in most jurisdictions is that corporate directors have unfettered access to the corporation’s books and records, including privileged communications between the company and its attorneys.^[1] In most jurisdictions—including Delaware, Illinois, Virginia, D.C., and Massachusetts—a director has a presumptive right to inspect corporate records for any purpose related to the director’s position, and the company has the burden to show an improper purpose.^[2] In other jurisdictions, including New York, a director has the absolute right, regardless of the director’s purpose, to inspect corporate records^.[3]

Under either approach, directors must seek access to company records in their capacity as a director. For example, a director cannot use their inspection rights to access privileged documents in a lawsuit that the director filed against the company in the director’s capacity as a shareholder.

Finally, a corporate officer alone cannot prevent a director from accessing the company’s privileged records because the corporation’s directors have the ultimate authority to waive or assert attorney-client privilege for the company.

Former Directors Generally Cannot Obtain the Company’s Privileged Records

On the other hand, in most jurisdictions, former directors generally do not have the right to inspect its books and records after they cease serving as directors.^[4]

If a former director seeks privileged documents in other contexts (for example, during discovery in a lawsuit against the company), courts take one of two approaches:

• Generally, no access. In most jurisdictions, including Illinois and California, a former director cannot obtain privileged company records in a dispute against the company because the company itself holds the privilege.^[5] Under New York law, which otherwise follows the majority approach, a former director may have a qualified right to view certain privileged corporate records to further both the former director’s “personal responsibility interest” and the shareholders’ interests.^[6] For example, a former director who is sued for alleged wrongdoing committed while serving as a director (in contrast to being the plaintiff in a suit against the company) may be able to view certain records to prepare their defense in the lawsuit.

• Generally, access. In other jurisdictions, such as Delaware, a former director may obtain privileged company records created during the director’s tenure because, at the time those communications were created, the company had no expectation that the communications would be confidential as to the director.^[7]

Because directors and former directors may be able to access privileged company records when engaged in a dispute with the company, it is important for companies to consider how to protect their privileged communications from disclosure.

ENDNOTES

[1] Courts that have addressed a LLC manager’s access to privileged company records have generally applied the same rules governing a corporate director’s right to access privileged records. See, e.g., Pearl City Elevator, Inc. v. Gieseke, No. 2020-0419-JRS, 2020 WL 5640268, at *2 (Del. Ch. Sept. 21, 2020) (Delaware law).

[2] 8 Del.C. § 220(d) (Delaware law); Munroe-Diamond v. Munroe, 2019 IL App (1st) 172966, ¶ 27 (Illinois law); Va. Code § 13.1-773.1 (Virginia law); D.C. Code § 29-313.05 (District of Columbia law); Mass. Gen. Laws ch. 156D, § 16.05 (Massachusetts law).

[3] See, e.g., Brenner v. Hart Sys., Inc., 493 N.Y.S.2d 881, 884 (1985).

[4] See, e.g., King v. DAG SPE Managing Member, Inc., C.A. No. 7770-VCP, 2013 WL 6870348, at *6 (Del. Ch. Dec. 23, 2013); Narahari v. DBLS Holdings Ltd., 90 Mass. App. Ct. 1119 (2016).

[5] See, e.g., Wolf v. CDS Devco, 185 Cal. App. 4th 903, 919, 921 (2010) (California law); Dexia Credit Loc. v. Rogan, 231 F.R.D. 268, 277 (N.D. Ill. 2004) (Illinois law).

[6] People ex. rel. Spitzer v. Greenberg, 851 N.Y.S.2d 196, 201 (N.Y. App. Div. 2008) (granting former directors access to view legal memoranda regarding specific transactions, as opposed to general business matters, in order to prepare their defenses in pending criminal investigation).

[7] Kirby v. Kirby, C.A. No. 8604, 1987 WL 14862, at *7 (Del. Ch. July 29, 1987).