In disputes and litigation among shareholders of closely held corporations, the shareholder excluded from access to corporate records and information is often also a director. When this situation arises, the withholding of information takes on an entirely different dimension. The management of Texas corporations is entrusted to the directors. Implicit in that idea is that the directors must have access to all information within the corporation. Whatever limited rights there may be for management to withhold information from a shareholder, those rights vanish when the shareholder is also a director.
The Business Organizations Code provisions dealing with inspection by directors and other "governing persons" is quite different from those provisions dealing with inspection by a shareholder. Directors are not required to make specific requests, state any purpose, or agree to "reasonable" restrictions. The officers and employees of a corporation work for the directors. A director is within his rights to require the corporation to provide any information reasonably related to a director's responsibilities (which would be pretty much everything related to the corporation), to require that the information be gathered or copied for him by corporate employees, and to have the corporation bear all expenses. Obviously, a director could abuse those rights, but the director's exercise of his powers is limited by his own duties of loyalty and care to the corporation. The director must exercise his powers solely for the benefit of the corporation. If the director abuses his powers for personal benefit, then the corporation may seek redress, but the remedy is directed at any abuse by the director; the corporation may not seek to protect against hypothetical misconduct by restricting information to one of its own directors. Therefore, for example, it would be completely inappropriate for a corporation to require a director to sign a confidenitiality agreement, because the director's fiduciary duties to the corporation already impose strict duties against any breach of confidentiality or harm to the corporation.
Unlike shareholder's inspection rights, the right of a director of a corporation to inspect the corporate books and records and access all company information is absolute. As one court has noted, because directors of a corporation are charged with managing the business and affairs of the corporation,
It would seem to be axiomatic that the individual director cannot make his full contribution to the management of the corporate business unless given access to the corporation’s books and records. The information therein contained is ordinarily requisite to the exercise of the judgment required of directors in the performance of their fiduciary duty so much so that the directors’ right of inspection has been termed absolute, during their continuance in office at all reasonable times.
At the time Chavco Investment Co., Inc. v. Pybus was decided, the Texas Business Corporation Act did not specifically confer upon directors the right to inspect the corporate books, however, the court of appeals held that this right existed by common law. The Texas Business Organizations Code specifically provides directors the right of inspection and a remedy for violation of that right. The director's right to company information exists only when his purpose is “reasonably related to his service as a director”; however, the director is not required to state his purpose or even to make a written demand.
Frequently, when there is a dispute among shareholders, the attorney paid by the corporation will actually work for with one side or the other, typically with the side aligned with the controlling shareholder. This common occurrence is actually a dangerous ethical conflict for the attorney. In this instance, in all likelihood, the communications with the corporation’s attorney are not privileged as to another director. Texas courts have not confronted this issue, although the statement in Chavco Inv. Co., Inc. v. Pybus, that the director’s right to information is “absolute” would certainly seem to imply that result. Delaware courts have confronted this issue in a number of contexts and have uniformly held that the attorney–client privilege between the corporation and the corporate counsel does not shield communications from a director. When a corporation employs legal counsel, each of the members of the board of directors has a status co-equal with the corporation as “client.”
The issue is not whether the documents are privileged or whether plaintiffs have shown sufficient cause to override the privilege. Rather, the issue is whether the directors, collectively, were the client at the time the legal advice was given. Defendants offer no basis on which to find otherwise, and I am aware of none. The directors are all responsible for the proper management of the corporation, and it seems consistent with their joint obligations that they be treated as the ‘joint client’ when legal advice is rendered to the corporation through one of its officers or directors.
As a matter of law, communications made during the tenure of any director could not have been intended to be kept confidential from that director. “Absent a governance agreement to the contrary, each director is entitled to receive the same information furnished to his or her fellow board members.”
Furthermore, even after a director’s tenure expires or the director is removed, that director continues to be entitled to discovery of all communications with the corporation’s counsel that occurred during his tenure—for the obvious reason that such communications were not privileged when made, and there is no legal principle that would create a privilege ex post facto. In Kirby v. Kirby, the Delaware Chancellor held that, as to attorney–client communications that occurred during the tenure of former directors, it is not possible for any privilege to have been created for those communications, and therefore, there is no basis for the invocation of the attorney–client privilege at a later date.
Independently, Delaware courts have held that the corporation is prohibited from asserting the attorney–client privilege as to information to which a director is entitled. A corporation may not “assert the privilege to deny a director access to legal advice furnished to the board during the director’s tenure.”
In a situation where there is a dispute with one of the directors, where the board or management has a good faith reason for consulting with counsel without the participation of that director, the law does provide mechanisms for preserving the privilege. As the Chancellor held in Moore Business Forms, Inc. v. Cordant Holdings Corp.:
Holdings had alternative means to enable its directors (other than Mr. Rogers) to receive confidential attorney advice not discoverable by Moore. Holdings could have bargained for such protections in the Stockholders Agreement. Alternatively, and independent of the Stockholders Agreement, the Holdings board could have acted, pursuant to 8 Del.C. § 141(c) and openly with the knowledge of Moore and Rogers, to appoint a special committee empowered to address in confidence those same matters. Under either scenario the special committee would have been free to retain separate legal counsel, and its communications with that counsel would have been properly protected from disclosure to Moore and its director designee. Neither approach was followed here.
Where there is a dispute between the corporation and a shareholder who is also a director, there may be a
legitimate need for privileged communications with a company attorney. In that situation, the only way that the corporation may preserve the privilege is to have the board vote to create a special committee regarding the dispute and to have that committee retain separate counsel. In most situtations, however, the corporation has a duty to remain neutral on matters of disputes between shareholders, and corporate counsel should advise the individual shareholder parties to the dispute to obtain (and pay for) their own lawyers to handle the dispute.
|About the author: Houston Business Lawyer Eric Fryar is a published author and recognized expert in the field of shareholder oppression and the rights of small business owners. Eric has devoted his practice almost exclusively to the protection of shareholder rights over the last 25 years. Learn more||
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