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Buttonwood Tree Value Partners L.P. v. R.L. Polk & Co. Inc.

Court of Chancery of Delaware

January 10, 2018

Buttonwood Tree Value Partners, L.P., et al.
v.
R.L. Polk & Co., Inc., et al.

          Date Submitted: November 1, 2017

          SAM GLASSCOCK, III VICE CHANCELLOR.

         Dear Counsel:

         It bears repeating what this Court has stated before: that Delaware Rule of Evidence 502(b)-codifying the attorney-client privilege-stands in contrast to the bulk of the Rules of Evidence. The latter are largely designed to promote the search for truth with respect to the matter litigated. Rule 502, by contrast, protects attorney-client privilege in a way that is, in a narrow sense, inimical to that goal. In a broader sense, of course, the rule promotes justice by allowing free communication between client and counsel, a right which the Rules (and common sense) hold superior, in most instances, to the incremental advantage in the search for truth to be gained from invading the privilege.

         Here, the Plaintiffs move for an order to compel production despite the privilege. There are situations where the search for truth or other meritorious interests are so compromised by maintenance of the attorney-client privilege that justice requires that the privilege yield. Strait is the gate and narrow the road to an order vitiating the privilege, however. The Plaintiffs rely on the so-called Garner[1]and crime-fraud exceptions to the application of the privilege; for the reasons below, I deny the Motion to Compel to the extent that it relies on those exceptions.

         I. BACKGROUND

         In this matter, Plaintiffs Buttonwood Tree Value Partners, L.P. and Mitchell Partners L.P. allege that they received inadequate consideration from R.L. Polk & Co. Inc. for stock they sold to Polk as part of a 2011 self-tender.[2] According to the Plaintiffs, about two years after these transactions, members of the Polk family, which collectively held over ninety percent of Polk's common stock, sold the company at a premium representing three times the self-tender price. Between the self-tender and the sale, moreover, Polk stockholders received dividends amounting to over one-third of the self-tender price. And, in describing the self-tender to its stockholders, Polk allegedly failed to disclose several material facts, including that the Polk family had been considering a sale of the company for some time. The crux of the Complaint is that the Polk family-aided and abetted by non-Polk family directors and Polk's lawyers and financial advisors-breached its fiduciary duties by engaging in a scheme to enrich itself at the expense of Polk's minority stockholders.

         On July 24, 2017, I issued a Memorandum Opinion holding that the Complaint stated a claim against the Polk family for breach of fiduciary duties, but that it failed to do so as to the non-Polk family directors or Polk's law firm and financial advisor.[3] Before me now is the Plaintiffs' Motion to Compel, which seeks production of documents that the Defendants have withheld on the basis of attorney-client privilege and the work-product doctrine. The Plaintiffs argue that several of the entries on the privilege logs produced by the Defendants are deficient, and that in any event, all of the documents withheld as privileged should be produced under the Garner and crime-fraud exceptions. At oral argument on the Motion, I indicated that I would issue a written ruling on the applicability of these two exceptions to the documents in question. My decision follows.

         II. ANALYSIS

         A. The Attorney-Client Privilege and the Garner Exception

         The attorney-client privilege promotes justice by encouraging candor between clients and their attorneys.[4] The privilege is codified in Delaware Rule of Evidence 502(b), which provides that

[a] client has a privilege to refuse to disclose and to prevent any other person from disclosing confidential communications made for the purpose of facilitating the rendition of professional legal services to the client (1) between the client or the client's representative and the client's lawyer or the lawyer's representative, (2) between the lawyer and the lawyer's representative, (3) by the client or the client's representative or the client's lawyer or a representative of the lawyer to a lawyer or a representative of a lawyer representing another in a matter of common interest, (4) between representatives of the client or between the client and a representative of the client, or (5) among lawyers and their representatives representing the same client.[5]

         The attorney-client privilege is critical to "the proper administration of justice, " but it is not absolute.[6] There are several exceptions to the privilege, some of which are codified in Delaware Rule of Evidence 502(d).[7]

         The Garner exception is a judicially created doctrine founded on the recognition that "where the corporation is in suit against its stockholders on charges of acting inimically to stockholder interests, protection of those interests as well as those of the corporation and of the public require that the availability of the privilege be subject to the right of the stockholders to show 'good cause' why the privilege should not apply."[8] A corporation invokes the attorney-client privilege through its officers and directors; those individuals owe a duty to the stockholders to exercise the privilege in the best interests of the corporation.[9] On the other hand, "management has a legitimate concern that its confidential communications should be allowed to remain confidential."[10] Thus, the Garner exception balances "the privilege's purpose of encouraging open communication between counsel and client [against] . . . the right of a stockholder to understand what advice was given to fiduciaries who are charged with breaching their duties."[11]

         Garner provides the following non-exhaustive list of factors a court may consider in deciding whether the exception should apply:

[1] the number of shareholders and the percentage of stock they represent; [2] the bona fides of the shareholders; [3] the nature of the shareholders' claim and whether it is obviously colorable; [4] the apparent necessity or desirability of the shareholders having the information and the availability of it from other sources; [5] whether, if the shareholders' claim is of wrongful action by the corporation, it is of action criminal, or illegal but not criminal, or of doubtful legality; [6] whether the communication related to past or to prospective actions; [7] whether the communication is of advice concerning the litigation itself; [8] the extent to which the communication is identified versus the extent to which the shareholders are blindly fishing; [9] the risk of revelation of trade secrets or other information in whose confidentiality the corporation has an interest for independent reasons.[12]

Garner itself does not say that certain factors are more important than others, but Delaware courts have typically accorded "particular significance" to three.[13] "They are: (1) the colorability of the claim; (2) the extent to which the communication is identified versus the extent to which the shareholders are blindly fishing; and (3) the apparent necessity or desirability of shareholders having the information and availability of it from other sources."[14] I view the application of these factors thusly: The first two are gatekeepers; they function as sieves to strain out frivolous attempts to vitiate the privilege. Those matters clearing that gate are subject to a balancing test to see whether the interest in discovery, or that of maintaining the privilege, is paramount.

         Our Supreme Court has described the Garner exception as "narrow, exacting, and intended to be very difficult to satisfy."[15] A stockholder-plaintiff seeking to defeat the privilege under Garner bears the burden of establishing good cause to do so.[16] And Garner applies in "plenary stockholder/corporation proceedings" as well as Section 220 actions.[17]

         The Defendants note that, unlike the typical Garner plenary-action proceeding, this matter does not involve a derivative action on behalf of the corporation. They point out that the justification for Garner applies with the most force where defendant corporate actors assert the privilege on behalf of the very entity that the plaintiffs purport to represent derivatively, in which case the assertion of privilege on behalf of the corporation and its principals may be inimical to the corporate interest. Here, the Plaintiffs are former stockholders, asserting a direct claim that a class of stockholders was injured by corporate fiduciaries. The Defendants argue that, in such a case, Garner is inapplicable. Logically, it appears to me that the doctrine is applicable, but that the nature of the action must be accounted for in the balance of interests that Garner requires.[18] I need not so hold, however, because, assuming the doctrine applies, the Plaintiffs have nonetheless failed to demonstrate that their Motion to Compel should be granted.

         The parties focus on the three Garner factors traditionally emphasized by Delaware courts. The Plaintiffs argue that their fiduciary duty claim is colorable, that they are not engaged in a fishing expedition in seeking production of the privileged documents, and that the information contained in those documents is both necessary to prosecute the action and unavailable from other sources. The Defendants disagree. I address each of these factors in turn.

         The Plaintiffs' claim for breach of fiduciary duty against the Polk family is colorable. That claim survived a motion to dismiss brought by the Defendants. I found it reasonably conceivable that the Polk family, acting as a control group, stood on both sides of the 2011 self-tender, and that therefore entire fairness applied. I then held that the Complaint adequately alleged that the self-tender was not entirely fair to the Plaintiffs. In making that determination, I relied on the allegation that stockholders "who tendered forwent, as a result, extraordinary dividends amounting to over one-third of the sale price they received, together with merger consideration in an amount three times the Self-Tender price, within a period of around two years."[19] Contrary to the Defendants, this Court has held that a claim is colorable under Garner if it has survived a motion to dismiss.[20] Thus, this factor favors disclosure of the privileged documents.

         The next factor-"the extent to which the communication is identified versus the extent to which the shareholders are blindly fishing"[21]-also supports disclosure. The Plaintiffs seek production of about 1200 documents. That is a relatively large number of documents, but they relate to advice Polk sought in connection with the sale of the company, the 2011 self-tender, and various restructuring options that were considered around this time. The Plaintiffs' surviving claim boils down to the assertion that the Polk family breached its fiduciary duties by initiating a self-tender without informing Polk's minority stockholders that it intended to put the company up for sale, among other things. And part of the Plaintiffs' theory is that at least one of the restructuring options-converting the company to Subchapter S status-was simply "a ruse to eliminate minority shareholders."[22] The documents sought, then, are tailored to the Plaintiffs' allegations, and there is no indication that "production will . . . be overly burdensome or require additional searches by the company."[23]

         While these two factors support disclosure, they mean simply that the Plaintiffs have cleared the initial hurdle; my decision then turns on the question whether the information contained in the privileged documents is both necessary and unavailable from other sources.[24] This Court has held that information found in privileged communications is available from other sources when depositions may allow a stockholder-plaintiff to obtain the information without intruding on the attorney-client privilege.[25] That is the case here. The Plaintiffs have yet to depose a single party witness, though they have deposed non-party Jeff Risius, one of Polk's financial advisors. And there is no reason to believe that depositions of the Defendants (and other fact witnesses) would fail to reveal non-privileged information about the Polk family's plans regarding the self-tender, the sale of the company, and various restructuring possibilities. That is the information the Plaintiffs need to prove their allegation that the Polk family hatched a scheme to benefit itself to the detriment of the minority stockholders. This factor therefore tips against disclosure of the privileged documents.

         The Plaintiffs suggest that the documents they seek will help them prepare for the depositions they plan to take, and that in any case, the Defendants may simply lie about the events in question when they are deposed. But that is not enough to show good cause under Garner. Privileged documents will often be useful to attorneys preparing to depose witnesses, and there is always the concern that some witnesses will be less than truthful during questioning. The question is not whether it is easier to obtain the information at issue from privileged documents than from depositions of fact witnesses, or whether access to privileged communications will make it easier to take depositions. If the Court were to adopt that test, Garner's scope would expand significantly, an outcome contrary to our Supreme Court's admonition that the exception is "narrow, exacting, and intended to be very difficult to satisfy, "[26] and ...


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