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The In-House Advisor Published by Shepard Davidson & Renee Inomata

Intra-Company Disputes: Implications for the Attorney-Client Privilege and Fiduciary Duties

Posted in Attorney-Client Privilege, Fiduciary Duties

In the course of its decision in Chambers v. Gold Medal Bakery, Inc., the Supreme Judicial Court of Massachusetts highlights a number of important rules related to the attorney-client privilege, as well as various rights and duties of officers and directors in closely held corporations.  While it is important to understand the detailed facts of Chambers in order to gain a full appreciation of its multitude of specific rulings, the overarching story is a familiar one that has played itself out over and over again (with the most notorious example being Demoulas v. Demoulas).

Gold Medal Bakery was founded in 1912 by Auguste LeComte.  Auguste had two sons, Leonidas (Leo) and Roland, each of whom became 50% shareholders in the two companies that comprised the business.  After Leo and Roland died, their immediate family members obtained each brother’s respective 50% equity interest and each family held 50% of the seats on the board of directors.  Notwithstanding the formalistic equality between the two branches, and as often is the case when there are intra-family business disputes, Roland’s family was much more involved in the day-to-day operations of the business than was Leo’s family.

At some point, Leo’s family became dissatisfied with how the business was being run. They sought to be bought out and, eventually, sued Roland’s family and one of the companies for a variety of reasons.  In connection with that litigation, Leo’s family sought various corporate documents and communications between Roland’s family and the company’s counsel. It was in this context that the SJC made the following rulings and/or reiterated the following legal principles:

  • A corporate director who is not adverse to the corporation generally is entitled to equal access to legal advice provided to other board members about the company – even if the person seeking it was not on the board at the time the legal advice was provided.
  • A director whose interests are adverse to the company’s interests – as opposed to being adverse to the interests of another director – is not entitled to obtain privileged communications between company counsel and other directors, nor is such director entitled to obtain access to the company’s “work product” that generally is protectable from disclosure.
  • The analysis as to whether a director is seeking privileged communications and/or work product for reasons that are adverse to the company is fact specific, and there is no one factor or combination of factors that always control the outcome of this analysis.
  • It is important to distinguish communications between counsel and board members in connection with legal advice, on the one hand, from communications between counsel and board members about the company’s financial status, general health, or other matters, on the other hand, because attorney-client communications only are privileged if they are in connection with giving or receiving legal advice.
  • There is a big distinction between (potentially) preventing a director from obtaining access to privileged communications and/or work product, on the one hand, and corporate books and records, on the other hand, because a director almost always needs, and is entitled to, access to company books and records to fulfill his fiduciary duty as a director.

In light of the multitude of rulings based on some finely parsed reasoning, Chambers is a must-read for any in-house counsel, particularly those who represent closely held businesses.