/>iWhen corporate management requests or obtains legal advice from corporate counsel, management expects those communications to be protected from disclosure by the attorney-client privilege, and usually they are. But there are exceptions.
In certain circumstances, shareholders (of corporations) and members (of limited liability companies) can obtain confidential communications between corporate management and the company’s attorney that would otherwise be protected by the attorney-client privilege.
A decision recently issued by the New York Supreme Court (County of Saratoga) illustrates one of these exceptions — the “fiduciary exception.”[1] The court ruled that the fiduciary exception to the attorney-client privilege enabled the minority owner of a multi-company family business to obtain information about communications between corporate management and the companies’ attorney. Under the fiduciary exception, a shareholder or member can obtain the company’s otherwise-privileged information by satisfying a fact-intensive, multi-factor analysis that “good cause” exists to disregard the attorney-client privilege. The fiduciary exception may apply when a minority owner alleges breach of fiduciary duty or similar wrongdoing against corporate management.
The court in this case considered several factors in concluding that the minority owner could obtain communications between management and the companies’ attorney and between the companies’ attorney and their accountant:
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The business did not have any disinterested owners or managers to investigate the alleged wrongdoing because one of the owners was the plaintiff and the only other two owners were defendants.
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The information sought concerned the key transactions at issue in the lawsuit, including management’s refusal to provide books and records to the plaintiff, management’s decision to remove the plaintiff as a director, and management’s elimination of the plaintiff’s ownership of one of the companies. The companies’ attorney advised management throughout these transactions, and management may have relied upon that advice in undermining the plaintiff’s interests.
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The information sought may have been the only available evidence of whether management acted in the interests of the plaintiff and the companies or in their own personal interests.
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The plaintiff’s claims for self-dealing and conflict of interest were at least “colorable.”
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The information sought was specific; the plaintiff was not “blindly fishing.”
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None of the information sought intruded upon advice concerning the lawsuit.
Based on the court’s ruling that the fiduciary exception applied, the minority owner had the right to obtain information that corporate management expected was protected from disclosure by the attorney-client privilege.
As we previously have discussed, not all jurisdictions recognize the fiduciary exception, and not all jurisdictions that recognize it apply the same test. Moreover, members of Illinois limited liability companies generally have a better chance of obtaining privileged communications between management and the company than members of LLCs in most other jurisdictions and shareholders of corporations organized in any jurisdiction. In prior posts, we have also discussed steps that companies and their management can take to prevent minority owners from obtaining privileged communications.
To avoid application of the fiduciary exception, majority owners should consider engaging their own attorneys — and not seeking advice from company attorneys — when considering actions that a minority owner could challenge as self-dealing or a breach of fiduciary duty.
FOOTNOTES
[1] Celia v. Celia, 2023 NY Slip Op 30995(U) (Sup. Ct. Mar. 31, 2023).
