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In re ISN Software Corp. Appraisal Litigation

Court of Chancery of Delaware

April 10, 2014

In re ISN Software Corp. Appraisal Litigation,

Submitted: April 7, 2014

Jon E. Abramczyk John P. DiTomo Christopher P. Quinn Lauren K. Neal Suite 200 Morris, Nichols, Arsht & Tunnell 1201 N. Market Street Wilmington, DE 19899

John M. Seaman Daniel A. Gordon Abrams & Bayliss LLP 20 Montchanin Road, Wilmington, DE 19807

Raymond J. DiCamillo Kevin M. Gallagher Richards, Layton & Finger, P.A. 920 North King Street Wilmington, DE 19801

Dear Counsel:

This is an appraisal action brought by Petitioners Ad-Venture Capital Partners, Polaris Venture Partners, VI, L.P., and Polaris Venture Partners Founders' Fund VI, L.P. to determine the fair value of their shares in ISN Software Corp. ("ISN"). On January 9, 2013, the ISN board of directors approved a freeze-out transaction through which, upon written consent of ISN's majority stockholders, certain minority stockholders of ISN were cashed out of their interest in ISN for $38, 317 per share;[1] the Petitioners filed their Verified Petition for Appraisal in this action on March 7, 2013. On October 30, 2013, Vice Chancellor Glasscock issued a bench ruling on the Petitioners' First Motion to Compel, [2] in which he rejected the Respondent's argument that discovery from the files of certain managers and directors of ISN would not uncover information relating to the ISN board's decision in setting the merger price, and instead determined that the Petitioners' request for documents from those files was reasonably calculated to lead to the discovery of evidence both admissible and relevant in an appraisal proceeding.[3] On April 7, 2014, I heard oral argument and issued a partial bench Draft Report on the Petitioners' Second Motion to Compel; I hereby adopt my April 7 bench ruling as a Final Report, and address the remaining issues below.

I. Analysis

Petitioners contend in their Second Motion to Compel that (1) the Respondent has improperly claimed attorney-client privilege over certain draft documents created by management but sent to attorneys "for review, " and (2) the Respondent has waived the attorney-client privilege with respect to otherwise privileged communications pertaining to the ISN board's decision to set the merger price, as the Respondent has placed the merger price "at issue." I address those contentions in turn.

1. Draft Documents

The attorney-client privilege prevents discovery of communications between lawyers and clients where a lawyer's advice is sought in "a professional legal capacity;" the privilege is intended to "foster the confidence of the client and enable [her] to communicate without fear in order to seek legal advice."[4] The Petitioners here challenge the Respondent's claim of privilege over certain draft documents, including draft board minutes, created by ISN's management but "forwarded to counsel for legal review."[5] The Petitioners contend that the Respondent may not "claim privilege over a document merely because it was forwarded to counsel, "[6] as "ISN has never made a claim of work-product with respect to draft minutes, " and "the drafts Petitioners' [sic] seek are of minutes in which (1) no attorney attended, (2) no attorney authored and (3) the final minutes do not reflect a single conversation with counsel."[7] According to the Petitioners, "ISN is attempting to shield relevant non-privileged documents from discovery by funneling those documents through its counsel, " but the facts contained in the draft documents at issue "do not become privileged merely by transmitting those facts to an attorney."[8]

On the other hand, the Respondent contends that draft board minutes are per se not discoverable, and that "documents sent to legal counsel for the purpose of facilitating the rendition of professional legal services are privileged, "[9]understanding this Court's decisions in In re Quest Software Inc. Shareholders Litigation[10] and Jedwab v. MGM Grand Hotels, Inc.[11] to foreclose the Petitioners' discovery requests for draft documents. Specifically, the Respondent suggests that a comparison of draft documents sent for legal review and their final counterparts may reveal the underlying legal advice that caused the Company to make certain edits to those documents.

In Jedwab, this Court denied a plaintiff's motion to compel the production of draft SEC disclosure documents, explaining that:

Since plaintiff has available to it the publicly-filed [SEC disclosure] documents, it is apparent that the only information available from prior drafts relates to matters appearing in prior drafts that were deleted, augmented or otherwise modified in the final product. Even a superficial understanding of the process by which SEC filings are prepared by lawyers and other advisors of a client permits one to understand that such modifications are made as a result of communications between a client or its representatives and its lawyers.[12] The Court found that the documents sought by plaintiffs were therefore privileged, noting:
It might be argued that the inference of a privileged communication, as opposed to the communication itself, ought not to be enough to successfully invoke the privilege, and it is doubtlessly true that the simple fact that from a document one may infer a communication from a client to a lawyer would not alone establish a basis to protect such a document from discovery. However, at least where, as here, the document itself is prepared by a lawyer in a setting in which it is intended to remain confidential until a final version is deemed appropriate for public disclosure and where the only pertinence of the document to the discovery process is the inferential disclosure of the communication from a client to its lawyer, it strikes me that the ...

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