Inadvertent disclosure
By Doug Raymond

Spencer Stuart / DirectorS & Boar DS Director S r oSter 12 directors & boards T h e r e h a s b e e n a s t e a d y i n c r e a s e i n l i t i g a t i o n o v e r conflicts of interest and al- legations of wrongdoing in- volving officers and directors of public companies. In addition, there certainly is greater scrutiny of possible misdeeds, including corporate investigations of alleged misconduct, which have dra- matically increased. When a board de- cides to launch an investigation (a topic for another day), a well-advised board often will form a special committee of disinterested directors to in- vestigate the allegations of potential w rongdoing, and the committee w ill engage outside counsel to assist. The lawyers review the rel- evant documents, interview employees and others, and then make their determina- tions. They, of course, report their findings to the special c o m m i t t e e . T h e i r r e p o r t , whether written or oral, may contain confidential and sen- sitive information about the company and the alleged mis- conduct. Boards will almost always want to keep this sen- sitive information away from potential (or actual) plaintiff class action attorneys by relying on the attorney-client privilege. If do n e r i g h t , t h e a t to r n e y - cl i e n t privilege will usually protect much of the sensitive communication between the special committee and its counsel, as well as the results of the investiga- tion. However, if the privilege cannot be assured, the plaintiffs may get access to extremely damaging information, and the company will find that it has done their work for them. The recent Delaware case of Ryan v. Gifford reminds us that it can be ver y easy to lose inadvertently the protection of the attorney-client privilege. In Ryan, the board of directors of Maxim Integrated Products Inc. formed a special committee to investigate al- leged wrongful stock option backdating, including grants made to some of the directors. The committee and its coun- sel conducted a thorough investigation and prepared and delivered a compre- hensive oral report to the committee and subsequently to the entire board — including the dire c tors under investigation. In the securities class ac- tion brought against Maxim, the plaint iff s claimed that the lawyers’ presentation to t h e f u l l b o a rd h a d w a ive d the attorney-client privilege over the findings, and they s o u g h t d i s cove r y o f a l l o f the materials relating to the investigation, as well as all of the communications be- tween the special committee and its counsel and between t h e s p e c i a l co m m i t te e , i t s counsel, and the full board. The defendants claimed that these communications were protected by an attorney-cli- ent privilege between the special com- mittee and its counsel and by a joint privilege between the company and the counsel. Normally, the attorney-client privi- lege is waived if communications be- tween the lawyer and the client are made in the presence of third parties, unless they are for the purpose of seeking legal advice (which was not the situation in this case). When the special committee and its counsel made their presentation to the Maxim board, it was to advise the full board of the results of the com- mittee’s investigation. The court found that the directors under investigation, and the company’s counsel, who were present at this meeting, did not have the same interest in the findings as did the special committee. (The company coun- sel was also involved in representing the defendant directors.) The court there- fore agreed w ith the plaintiffs’ claim that the attorney-client privilege had been waived. When the special commit- tee and its lawyers disclosed the results of their investigation to the directors under investigation and their lawyers, the company waived any privilege it may have had. In the end, the company was forced to turn over all communications about this highly sensitive matter to the plaintiff. Ryan v. Gifford serves as an important reminder for directors when conduct- ing an investigation. While it is a com- mon and usually commendable practice for directors on a committee to share information with the other directors, that candor and transparency needs to be balanced against the very significant detriment that can occur if the infor- mation is obtained by persons who are hostile to the company. The Ryan case reminds us that it can be dangerous to share privileged information with oth- ers, even other directors who are, or in the future may be, caught up in share- holder or other litigation. Boards should establish a communi- cation policy for special committees con- ducting internal investigations. These policies should set the expectations for what information will be shared with the full board and the subjects of the inves- tigation, and should establish firewalls to prevent unauthorized persons from having access to privileged information. Ultimately, the goal is to prevent an in- advertent waiver of their attorney-client privilege that compromises the inves- tigation and results in the committee’s work being done for the benefit of their adversaries in litigation. ■ The author can be contacted at douglas. 12 directors & boards Lega L Brief Doug Raymond is a partner in the law firm Drinker Biddle & Reath LLP and heads its Corporate and Securities Group (www.drinkerbiddle. com). Inadvertent disclosure The Ryan case is a reminder of the need for board policies on the handling and communicating of privileged information. By Doug raymonD

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