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In re Information Management Services, Inc. Derivative Litigation

Court of Chancery of Delaware

September 5, 2013

In re Information Management Services, Inc. Derivative Litigation

Submitted: August 22, 2013

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Raymond J. DiCamillo, Scott W. Perkins, Richards, Layton & Finger, P.A., Wilmington, Delaware; J. Christian Word, Katherine A. Schettig, Latham & Watkins LLP, Washington, District of Columbia; Attorneys for Plaintiffs.

Peter B. Ladig, Katherine J. Neikirk, Morris James LLP, Wilmington, Delaware; J. Stephen McAuliffe, III, Miles & Stockbridge P.C., Rockville, Maryland; Scott Wilson, Miles & Stockbridge P.C., Baltimore, Maryland; Attorneys for Defendants.

Barry M. Klayman, Cozen O'Connor, Wilmington, Delaware; Donald N. Sperling, Jeffrey M. Schwaber, Jamie M. Hertz, Stein Sperling Bennett De Jong Driscoll PC, Rockville, Maryland; Attorneys for Nominal Defendant, Information Management Services, Inc.

OPINION

LASTER, Vice Chancellor.

Trusts that own fifty percent of the common stock of nominal defendant Information Management Services, Inc. (" IMS" or the " Company" ) allege that two of the Company's three most senior officers mismanaged the Company in breach of their fiduciary duties. The executives consulted with their personal lawyers and advisors about the alleged mismanagement using their work email accounts. IMS gathered the emails but took no position on whether they should be produced. The executives invoked the attorney-client privilege. They did not rely on the work product doctrine. The trusts moved to compel, arguing that the attorney-client privilege does not apply because the Company reserved the right to monitor all email communications on IMS accounts, thereby eliminating any reasonable expectation of confidentiality. The motion is granted.

I. FACTUAL BACKGROUND

The facts for purposes of the motion to compel are drawn from the allegations in the pleadings and the exhibits and affidavits submitted in connection with the briefing on the motion. What follows are not formal factual findings, but rather how the court views the record for purposes of a discovery ruling. At this stage of the case, the court cannot resolve conflicting factual contentions.

A. Information Management Services, Inc.

IMS is a Delaware corporation with its principal place of business in Rockville, Maryland. The Company provides analytical software tools and other products used primarily to evaluate clinical trials for biomedical research.

The Burton family and the Lake family each beneficially own fifty percent of the Company's common stock. The Burton family owns its half through two trusts, the EB Trust and the IMS Trust. Evelyn Burton is the sole trustee of the EB Trust; Michael Burton is the sole trustee of the IMS Trust. The Lake family owns the

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other half through the William H. Lake Grantor Trust. Brothers William Lake, Jr. and Andrew Lake are co-trustees of the Lake trust. Their mother, Jean Lake, is a beneficiary of the Lake trust. To differentiate among the individuals, this decision uses their first names.

The Company's board of directors (the " Board" ) has four members, two from the Burton family and two from the Lake family. The Burton family representatives are Evelyn and Michael. The Lake family representatives are Jean and Andrew.

Effective control over day-to-day management of the Company currently rests with the Lake family. It was not always so. Robert Burton and William Lake, Sr., founded the Company and managed the business together for many years. Robert, now deceased, was Evelyn's husband and Michael's father. William Sr., now retired, is Jean's husband and William and Andrew's father.

William Sr. retired in 2007. Robert passed away in 2010. At the time of Robert's death, William held the positions of President, Secretary, CFO, and Treasurer. Andrew held the position of Executive Vice President. Non-party Janis Beach, who joined the Company in 1974, held the position of COO. Since then, William, Andrew, and Janis have remained the most senior executives at the Company.

B. The Dispute

The Burton trusts allege that in the first quarter of 2011, William permitted IMS to overdraw its revolving line of credit by approximately $80,000, forcing IMS to obtain an emergency increase to meet payroll and other outstanding obligations. William allegedly did not inform the Board concurrently of this event or the Company's financial position.

In October 2011, Michael joined IMS. Michael perceived problems from inside the Company including lack of growth, a general failure to market the Company's intellectual property, and poor employee morale.

In May 2012, the Burtons scheduled a meeting with William and Andrew to discuss their concerns. William and Andrew cancelled the meeting. In June, IMS informed Michael that his employment would be terminated.

The Burtons next retained Venture Advisors Financial and Strategic Services, LLC (" Venture Advisors" ) to review the Company's books and records. Venture Advisors also interviewed William, Andrew, and Nancy MacGillivary, a bookkeeper.

In a report issued on July 30, 2012, Venture Advisors criticized senior management on several grounds, including their failure to understand or comply with Generally Accepted Accounting Principles, Federal Acquisition Regulations, and the Fair Labor Standards Act (the " FLSA" ). The report identified as issues an absence of professional accounting expertise, a lack of budgeting and financial planning, the use of unconventional compensation practices, and the failure to plan for the Company's " graduation" from Small Business Administration (" SBA" ) status.

During a special meeting of the Board on August 23, 2012, the directors discussed the Venture Advisors' report and the Burton family's concerns. The Burton representatives proposed to bring in professional managers to serve as the CEO and CFO. The Lake representatives declined, resulting in deadlock. The Board resolved to hire outside counsel to evaluate the Company's compliance with the FLSA. The Burtons complain that William picked the law firm himself and instructed the firm not to communicate with the Burtons

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or the Board before presenting its final report.

During a meeting of the Board on September 14, 2012, the Board resolved to hire a consultant to evaluate the SBA issues. The Board deadlocked over the selection of the consultant and the scope of work. In October 2012, the Company retained Rubino & Company, Chartered, a financial services company with a special focus on government contracting, to review the Company's accounting practices and financial reporting.

On November 1, 2012, the Board met again. The Burton representatives proposed terminating William for cause, eliminating the Executive Vice President position held by Andrew, bringing in a CEO from outside the Company, and hiring Robert Dudley of Venture Advisors as CFO. The Lake representatives declined, resulting in deadlock. The Burtons then refused to approve any bonuses for senior management or staff. Over the ensuing weeks, the Burtons modified their position, rejecting only the bonuses for William and Andrew.

C. The Litigation

On December 31, 2012, the Burton trusts filed a complaint that charges William with breaching his fiduciary duties as an officer of IMS by mismanaging the Company and Jean and Andrew with breaching their fiduciary duties as directors of IMS by protecting William and enabling him to continue running the Company. In response, on January 28, 2013, the Lake trust filed a complaint of its own that charges Evelyn and Michael with breaching their fiduciary duties by denying bonuses to management, causing the Company to incur liability to reimburse the federal government for amounts tied to the unpaid bonuses, and publicly disseminating confidential information about the Company. The complaint alleges that Evelyn and ...


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