Two More Companies Lose Attorney-Client Privilege Protection

Executive Compensation Blog originally appears on CompensationStandards.com

Courts have continued to reject companies' claims of protection under the attorney-client privilege and/or work product doctrines. Recently we have seen SEC v. Brady, 238 F.R.D. 429 (N.D. Tex. 2006) (the disclosure of a report of internal investigation with current auditors waived the privilege and required production of the underlying documents), and Ryan v. Gifford, 2007 WL 4259557 (Del. Ch. Ct. 2007) (the sharing of a report prepared for a special committee of a corporation with the entire board of directors waived privilege for all communications regarding the subject matter).

Now, in 2008, two more cases denied corporate boards' attempts to protect certain advice and information under the attorney-client privilege and/or work product doctrines.

In Hexion Specialty Chemicals, Inc. v. Huntsman Corp., the Delaware Chancery Court allowed the plaintiff, Hexion Specialty Chemicals, Inc., discovery primarily of documents prepared by or relating to the activities of defendant Huntsman Corp.’s financial advisor Merrill Lynch, Pierce, Fenner & Smith, Inc. The court concluded that Huntsman’s investment banker could not properly be regarded as a litigation or trial consultant within the meaning of a Delaware rule of evidence that would protect from disclosure information and material prepared by such a consultant. The court also concluded that the documents prepared by Merrill Lynch did not fall within the protection of the attorney work product doctrine.

Huntsman had hired Merrill Lynch to serve as its financial advisor under an October 10, 2005 engagement letter. Acting pursuant to that engagement, Merrill Lynch advised Huntsman in connection with the negotiation and signing of a July 12, 2007 merger agreement with Hexion. Merrill Lynch continued to serve as Huntsman’s financial advisor pursuant to that engagement. After economic conditions worsened, Hexion changed its mind and filed suit to avoid the transaction in June 2008. Huntsman then sent a one-page letter, dated June 24, 2008, to Merrill Lynch stating that, in addition to its role as the company’s financial advisor. Merrill Lynch did not form separate and distinct financial advisory and litigation consulting teams. Instead, the same Merrill Lynch group who had been performing financial advisory services for Huntsman added litigation advisory services to their duties.

In SEC v. Roberts, (N.D. Cal., August 8, 2008), the U.S. District Court for the Northern District of California ordered McAfee Inc. to turn over interview notes and other materials gathered by an outside law firm. Ironically, in this case, it was the McAfee's former general counsel who sought the disclosure, as part of his defense against a civil action brought against him by the U.S. Securities and Exchange Commission for allegedly altering the grant date for stock options awarded to him and other executives. McAfee Inc. formed a special committee to investigate allegations of stock options backdating at the company. The special committee hired Howrey LLP, a law firm.

The Court ordered Howrey to produce certain information and notes related to its investigation, including:

• all documents provided or made available to the SEC, Justice Department officials, or McAfee's board of directors;

• all factual information disclosed to the government or the board in response to their questions regarding statements made by various individuals interviewed by Howrey;

• interview notes with respect to three interviewees whose credibility, culpability, and demeanor had been discussed by Howrey attorneys with third parties; and

• Notes of meetings or communications with the government, the full board, or any McAfee board members who were not members of the special committee, subject to redaction to protect Howrey attorneys' mental impressions and conclusions.

After its investigation, Howrey made power point presentations to the McAfee board, SEC, the Department of Justice, and McAfee's former and current outside auditors. During the presentations, Howrey discussed some of its findings and answered questions about the individuals it interviewed. The court found that, to the extent Howrey orally disclosed to the government or to the board any information contained in the written material sought, the firm waived the attorney-client and work product privileges with respect to the material.

The court did allow McAfee to protect most of Howrey's interview notes under the attorney work product doctrine, because those notes included Howrey attorneys' mental impressions, conclusions, and opinions of the individuals interviewed. Additionally, except in a couple of cases, there was no evidence that Howrey had shared its mental impressions or conclusions with the government or with the McAfee board – which could have waived the protection.

ps: I will be speaking about this topic at next month's NASPP conference in New Orleans.

On September 2, 1864, Union Gen. William T. Sherman's forces occupied Atlanta during the Civil War. Things went down hill from there.