In two recent In re WeWork Litigation decisions, Chancellor Andre G. Bouchard of the Delaware Court of Chancery addressed attorney-client privilege in the corporate governance context. Both decisions stem from discovery disputes in lawsuits brought against SoftBank Group Corp. and its affiliated fund (collectively, “SoftBank”) for SoftBank’s alleged breaches of its fiduciary duties as controlling stockholder and its obligation under a Master Transaction Agreement, entered into in October 2019, to use reasonable best efforts to purchase up to $3 billion of common stock of The We Company (“WeWork”) in a tender offer. In each case, SoftBank opposed production of certain documents and communications, asserting that they were protected by the attorney-client or work product privilege, and, in each case, the court ruled against SoftBank, compelling production of the documents at issue. The decisions help define attorney-client privilege in corporate governance structures and in times of increased reliance on technology.
August 2020 Decision: Directors as the “Joint Client”
In a decision from August 2020,1 the Delaware Court of Chancery considered a novel question under Delaware law: “Does management of a Delaware corporation have the authority to unilaterally preclude a director of the corporation from obtaining the corporation’s privileged information?”
WeWork’s board of directors (the “Board”) formed a special committee (the “Special Committee”) in October 2019 to negotiate and oversee the proposed series of transactions contemplated by the Master Transaction Agreement. In April 2020, after SoftBank terminated the tender offer without purchasing any shares, the Special Committee brought an action on behalf of WeWork against SoftBank for breach of contract and breach of fiduciary duty. In response, SoftBank—the controlling stockholder of WeWork—requested that the Board, which was composed of four SoftBank designees, the two Special Committee members and two other directors, confirm that the Special Committee lacked the authority to pursue the action on behalf of WeWork. In a 6-2 vote (with only the two Special Committee members voting against), the Board authorized a search process to appoint two temporary board members to a new committee (the “New Committee”) to investigate “the proper scope of the Special Committee’s authority and the pending litigation.”
The Board appointed two new directors to the Board and to the New Committee. Following its two-month-long investigation, the New Committee unanimously concluded that the Special Committee did not have authority to initiate or maintain the litigation against SoftBank and directed WeWork’s legal department to promptly file a motion on behalf of WeWork for leave to dismiss the litigation.
Accordingly, WeWork subsequently filed a motion seeking leave to dismiss the action. In connection with its opposition to that motion, the Special Committee sought document and deposition discovery of WeWork’s privileged information (not privileged communications between the New Committee and its counsel), including documents and communications among WeWork management, in-house counsel and outside counsel relating to the establishment of the New Committee and the influence of WeWork management on its activities. WeWork management subsequently objected to the Special Committee’s request for privileged information and refused to provide such information to the Special Committee.
In determining whether WeWork management had the authority to unilaterally preclude the Special Committee from obtaining WeWork’s privileged information, the court focused on the “fundamental principle of Delaware law” that generally entitles directors of Delaware corporations to “share in legal advice the corporation receives.” Delaware law provides that a director’s right to information, including privileged information, is “essentially unfettered in nature” and the corporation cannot deny a director access to legal advice furnished to the board. The court then presented three limitations to a director’s general entitlement to access privileged information:
(1) the existence of an ex ante agreement among the contracting parties;
(2) the appointment of a special committee that retains separate legal counsel in connection with its work; and
(3) a board or committee withholding privileged information upon the existence of sufficient adversity between a director and the corporation such that the director could no longer reasonably expect that he/she was a client of the board’s counsel.
WeWork asserted only the third limitation to justify denying the Special Committee access to the information it was seeking. The court determined that “by its plain terms” this limitation was inapplicable, as the Board—WeWork’s governing body—did not decide to withhold information from the Special Committee; rather, WeWork management unilaterally made that decision.
The court reasoned that the unilateral decision by WeWork management to withhold privileged information from the Special Committee was inconsistent with the ”cardinal precept” of Delaware law that the board of directors manages the affairs of the corporation and, therefore, the directors should be treated as a “joint client” when legal advice is provided to the corporation.
Citing Delaware General Corporation Law § 141(a), the court highlighted that a Delaware corporation’s board of directors (as opposed to management) has ultimate responsibility for the oversight of the corporation. The court concluded that the argument asserted by WeWork management—claiming the right to “shield” WeWork’s privileged information from the entire Board—“turns these bedrock principles of Delaware law on their head.”
Ultimately, the court held that WeWork management was required to produce the privileged documents requested by the Special Committee. Absent the limited exceptions noted above, the right of a Delaware corporation’s board of directors to access corporate information, including privileged information, is broad in scope, as the directors should be treated as a joint client for purposes of attorney-client privilege.
December 2020 Decision: Communications on Third-Party Employer Email Accounts Found Not to Be Privileged
In a decision from December 2020,2 the Delaware Court of Chancery evaluated a separate attorney-client privilege-related matter arising from the In re WeWork Litigation: Do SoftBank personnel have a reasonable expectation of privacy when using their third-party employer-provided email accounts for SoftBank-related purposes in evaluating if the documents/communications retained privilege as confidential communications under Delaware Rule of Evidence 502?
Adam Neumann, one of WeWork’s founders, and We Holdings LLC (collectively, “Neumann”) demanded production of 89 responsive emails (the “Documents”) involving SoftBank’s in-house and outside counsel that were withheld from production or produced in a redacted form by SoftBank on the ground of attorney-client privilege. The Documents were transmitted via the email systems of Sprint, Inc. (“Sprint”), a third party that, at the time, was 84 percent owned by SoftBank but was not involved in the dispute. Although the Documents were sent to or from Sprint email accounts, the Documents related solely to SoftBank and did not concern the business or affairs of Sprint or any legal advice rendered for Sprint’s benefit.
During the time that SoftBank was the majority owner of Sprint, several individuals wore multiple hats at Sprint, SoftBank and WeWork. Two of these individuals, a Sprint executive and a Sprint employee, each of whom also had WeWork and SoftBank responsibilities, used their Sprint email accounts to seek and receive advice from SoftBank’s internal and external counsel concerning WeWork. The matter before the court turned on whether attorney-client privilege was waived by virtue of these individuals with dual roles using their Sprint email accounts to send and receive the Documents.
To determine whether attorney-client privilege had been waived, the court assessed whether the confidentiality of the communications had been maintained. Under Delaware Rule of Evidence 502(a)(2), a “communication is ‘confidential’ if not intended to be disclosed to third persons other than those to whom disclosure is made in furtherance of the rendition of professional legal services to the client or those reasonably necessary for the transmission of the communication.” In other words, the court considered whether the Sprint employees had a reasonable expectation of privacy while using their Sprint email accounts to receive WeWork-related privileged materials. If not, then any attorney-client privilege was waived.
The court answered the question presented by applying the four-factor test articulated in In re Asia Global Crossing, Ltd.:
(1) Does Sprint maintain a policy banning personal or other objectionable use?
(2) Does Sprint monitor the use of the employee’s computer or email?
(3) Do third parties have a right of access to the computer or emails?
(4) Did Sprint notify the employee, or was the employee aware, of the use and monitoring policies?3
The court determined that all four Asia Global factors weighed in favor of attorney-client privilege having been waived and compelled production of the Documents. First, the court examined Sprint’s Code of Conduct, which states, in relevant part, that “[e]mployees should have no expectation of privacy in information they send, receive, access or store on any of Sprint’s computer systems or network . . . [and] Sprint reserves the right to review workplace communications (including but not limited to Internet activity, email, instant messages, social media or other electronic messages, computer storage and voicemail).”
To evaluate the second Asia Global factor, SoftBank encouraged the court to consider the fact that there was “no indication that Sprint has ever reviewed any communications from within [the two employees’] accounts.” The court, however, focused on Sprint’s clear and explicit “express reservation” of its right to review its employees’ email communications, supporting production of the Documents.
Due to the third Asia Global factor “largely duplicat[ing] the first and second factors” and the lack of any compelling evidence provided by SoftBank showing that the two employees took “significant and meaningful steps to defeat access [to the Documents],” the court also weighed this third factor in favor of production of the Documents.
Finally, in weighing the fourth Asia Global factor, the court acknowledged that SoftBank failed to submit any evidence that the two employees were unaware of the policies set forth in Sprint’s Code of Conduct. In fact, the court recognized that it would be “hard to imagine” that the employees would have been unaware of the policies and “thus could not have had a reasonable expectation of privacy when they used their Sprint email accounts to share [SoftBank] information.”
Analysis of the four Asia Global factors contributed to a ruling in favor of Neumann, with the court finding that the Sprint employees’ expectations of privacy were unreasonable and, therefore, attorney-client privilege had been waived and ordered production of the Documents.
Takeaways – Potential Privilege Protections and Pitfalls
1. The August WeWork decision makes clear that management does not control the attorney-client privilege for advice provided to the corporation by its inside or outside lawyers; such privilege is the prerogative of the board of directors. Even in this case, where all members of the Board were conflicted (which led to the appointment of two new directors), management did not have the authority to withhold privileged communications from any members of the Board. The court rejected management’s contention that when management is stuck between two factions of the Board, it needs to be able to obtain its own legal advice that can be withheld from at least some members of the Board.
2. The August WeWork decision was a narrow one, and the court hinted that different facts could warrant a different decision. Significantly, the assertion that the Special Committee was adverse to WeWork was made by WeWork management, not the Board or even the New Committee. Had the Board or a committee asserted that the Special Committee was, under the circumstances, sufficiently adverse to WeWork such that the Special Committee no longer had a reasonable expectation that it was a client of the Board’s counsel, the court might have ruled against the Special Committee. In light of the assertion by management and not the Board or a committee, the court did not analyze and rule on the adversity issue.
3. The situation faced by the two Sprint employees in the December WeWork decision illustrates circumstances that are, as a threshold matter, applicable to all outside directors, including director representatives of major shareholders, such as activist investors and private equity funds, who might be more likely to find themselves in conflict situations with respect to certain board matters (and potentially face more litigation exposure). One approach to address this issue is the use of board portals, which provide a secure environment to maintain company control over, and the confidentiality of, the materials made available to directors. Using such portals avoids the issues that were found to have waived privilege in the December WeWork decision.
4. Companies should consider providing company email accounts to directors for use in conducting board business. In addition, companies should review how board members currently use third-party email accounts for board business and require that directors use company email accounts for board business. In the event a third-party email account must be used, a director should ensure that the account in not subject to third-party monitoring.
5. The use by directors of their personal third-party email accounts (e.g., Gmail) would likely be found to have a reasonable expectation of privacy and preserve confidentiality. There are downsides, however, to comingling personal emails with director-related emails should a matter result in litigation and a director’s emails have to be searched for production. Creating a separate, personal third-party email account for director communications would mitigate this concern. In certain situations, such as communications with directors on a special committee, personal third-party email accounts might be preferred over company email accounts to ensure such communications are not on company servers and potentially accessible by management or directors not on the special committee.
6. Although the December WeWork decision addressed use of third party-provided email, its reasoning could apply to text messages or other communications on a third-party device similarly provided to an individual.