Summary
stating that there is a "presumption that a sitting director is entitled to unfettered access to the books and records of the corporation . . . and certainly . . . to . . . whatever the other directors are given"
Summary of this case from SerVaas v. Ford Smart Mobility LLCOpinion
C.A. No. 16335-NC.
June 12, 1998.
Bruce L. Silverstein, Esquire, Young Conaway Stargatt Taylor, LLP, Wilmington, DE.
Kevin G. Abrams, Esquire, Richards, Layton Finger, Wilmington, DE.
Dear Counsel:
On April 21, 1998, Vincent Intrieri, a director of Avatex Corp. newly elected by the preferred stockholders, made a demand, pursuant to Section 220 of the Delaware General Corporation Law to examine books and records, including information pertaining to the pending merger proposal under the terms of which all of Avatex' preferred stock would be converted, or "squeezed down" into common. While Avatex substantially complied with Mr. Intrieri's demand, it resists producing to him, among other things, documents to which it claims attorney-client privilege. For the reasons set forth below, I conclude that, with the exception of two documents identified on the privilege log pertaining to the right of preferred holders to vote on the merger, Mr. Intrieri is entitled to examine all of the documents responsive to his Section 220 demand.
Section 220 grants directors the right to inspect a corporation's books and records "for a purpose reasonably related to the director's position as a director." 8 Del. C. § 220(d). When a director makes a Section 220 demand which is refused, a prima facie showing that he is entitled to the documents has been made, and the burden shifts to the corporation to show why this right of inspection should be denied or conditioned. Holdgreiwe v. The Nostalgia Network, Inc., Del. Ch., C.A. No. 12914, Allen, C. (Apr. 29, 1993) slip op. at 5-6 (quoting Henshaw v. American Cement Corp., Del. Ch., 252 A.2d 124, 128-29 (1969). Thus, the Court works from the presumption that a sitting director is entitled to unfettered access to the books and records of the corporation for which he sits and certainly is entitled to receive whatever the other directors are given. See Hall v. Search Capital Group, Inc., Del. Ch., C.A. No. 15264, Jacobs, V.C. (Nov. 15, 1996) ("Absent a governance agreement to the contrary, each director is entitled to receive the same information furnished to his or her fellow board members.").
Generally speaking, Mr. Intrieri's need for access to the information he seeks is amply demonstrated by the recently announced decision of the Avatex board to reconsider the terms of the pending merger proposal. Counsel has informed the Court that, in response to information raising questions regarding the appropriateness of the exchange ratio and other terms of the proposed transaction, the Avatex board of directors will meet soon to reconsider the terms of the merger proposal. In connection with such a meeting, it is to be expected that Mr. Intrieri will have a need to review the materials upon which his fellow directors based their earlier decision to approve the merger. Other than as discussed below, I conclude that he is entitled to do so.
Defendants argue that they should not have to produce to Mr. Intrieri two items identified on the privilege log as reflecting legal advice regarding the preferreds' voting rights: (i) a March 1997 Overview of Avatex Preferred Stock Rights and Preferences and (ii) a January 12, 1998 Memorandum re: voting rights of Avatex Preferred Stock. Avatex acknowledges that a corporation cannot assert the attorney-client privilege to deny a director access to legal advice furnished to the Board during the director's tenure. Moore Business Forms, Inc. v. Cordant Holdings Corp., Del. Ch., C.A. Nos. 13991 14595, Jacobs, V.C. (June 4, 1996) slip op. at 7.
Avatex cites Kirby v. Kirby, Del. Ch., C.A. No. 8604, Berger, V.C. (July 29, 1987), however, for the proposition that the rule does not apply to legal advice furnished at a time "outside" the directors' tenure. Kirby is not so broad. In Kirby, then Vice Chancellor Berger found that the attorney-client privilege may be asserted against directors with respect to legal advice furnished "after" they are no longer directors, and that materials may only be discovered upon a showing of a good cause analogous to that required of a stockholder in a derivative action. Kirby at 17-19. I do not read Kirby as standing for the proposition that the attorney-client privilege may be relied upon to withhold documents created before an individual becomes a director. Such a broad rule would have the potential to hinder a director's ability to perform his fiduciary duties.
Nevertheless, I conclude, in the circumstances presented here, that Avatex may assert a claim of attorney-client privilege against Mr. Intrieri as to documents reflecting legal advice given to the board of directors before Mr. Intrieri became a director and relating to the Corporation's contractual rights and obligations vis à vis the holders of the preferred stock. The Board had every right to consult with counsel and to obtain legal advice as to the interpretation of the rights of the corporation and of the preferred. Had Mr. Intrieri or another representative of the preferred stockholders been sitting on the Avatex board of directors at the time, appropriate steps, no doubt, could have been taken to shield the advice from potentially interested persons. The fact that Mr. Intrieri came to the board of directors later should not now cause a different result. Further, the issue with regard to the preferreds' voting rights has already been resolved. When the Board holds its upcoming meeting to review the terms of the merger proposal, it will not have occasion to reconsider the preferreds' voting rights. For these reasons, I conclude that Mr. Intrieri has no present need for and, thus, is not entitled to receive the two documents described above.
The parties are directed to submit a form of order.