Lessons Learned from the CBS-NAI Dispute, Part VI: Board Access to Privileged Communications with Company Counsel

Victor L. Hou is partner, Rahul Mukhi is counsel, and Jessica Thompson is an associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary Gottlieb memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

As described in a prior post, on May 14, 2018, certain members of the CBS board filed suit in Delaware seeking authorization to issue a special dividend intended to dilute the voting control of NAI, CBS’s controlling stockholder. [1] The majority of the CBS board (other than three directors with ties to NAI) subsequently considered and purported to approve a dividend of a fraction of a Class A (voting) share to be paid to holders of both CBS’s Class A (voting) common stock and Class B (nonvoting) common stock for the express purpose of diluting NAI’s voting interest in CBS, with the payment of such dividend conditioned on Delaware court approval.

Shortly after NAI filed a countersuit on May 29, 2018, NAI moved to compel the production of certain communications involving CBS’s outside and in-house counsel, including privileged documents concerning the decision to declare the dilutive dividend. NAI argued that, because the three NAI-affiliated members of the CBS board were joint clients of CBS’s counsel, NAI was entitled to unfettered access to otherwise privileged communications made prior to the filing of CBS’s complaint on May 14. NAI’s motion raised important issues regarding the rights of board members to access privileged communications with company counsel.

The Issues

Under Delaware law, directors of a company’s board, including those affiliated with the controlling stockholder, are “joint clients” for purposes of any “legal advice . . . rendered to [the company] through one of its officers and directors.” [2] The directors, therefore, presumptively have an “unfettered right” to access any legal advice rendered to the company or other members of the board. [3] The company and its counsel can shield communications as privileged against directors only where “sufficient adversity existed between them such that [the directors] could no longer have a reasonable expectation that they were clients of [the company’s] counsel.” [4] Such adversity must be made “openly” manifest to the adverse directors and Delaware courts have held that adversity perceived by counsel—but undisclosed to a joint client—is insufficient. [5]

In the CBS-NAI litigation, there was no dispute that communications between the CBS special committee and special committee counsel were protected by privilege. NAI instead argued that its affiliated board members could not be denied access to management and board communications with company counsel, given their status as joint clients. In addition, NAI argued that this access should extend to communications between in-house and outside company counsel, on the one hand, and members of the special committee and/or committee counsel, on the other hand, because the formation of the special committee did not create or make manifest adversity between the NAI and company counsel or change the status of the NAI-affiliated directors as joint clients of company counsel. NAI pointed to the special committee’s retention of its own counsel as evidence of the committee members’ understanding that all directors were joint clients of, and therefore could access communications with, company counsel. NAI also cited the fact that its affiliated directors were never told of any adversity with company counsel prior to the initiation of the litigation on May 14.

CBS took the position that the NAI-affiliated board directors were adverse to CBS management and other board members with respect to certain issues even prior to the commencement of the litigation. Specially, CBS’s counsel claimed adversity and privilege with respect to communications related to the potential CBS/Viacom transaction and communications between CBS’s counsel and the CBS special committee. Most notably, CBS also argued that there was an “inherent conflict” between the NAI-affiliated directors and other members of the CBS Board, this conflict should have been evident to NAI and therefore CBS counsel’s advice regarding issues of independence from NAI and the alleged “specter of controller overreach” was privileged. In connection with NAI’s motion to compel, CBS’s counsel filed an affidavit acknowledging that over many years (and prior to any proposed merger of CBS and Viacom and formation of the related special committees) it had advised certain members of CBS management and the board (unaffiliated with NAI) about potential ways to “mitigate” or “eliminate” NAI’s voting control, including through a stock dividend and “litigation options.”

NAI responded that any adversity claimed by CBS was never made apparent to the NAI-affiliated directors such that they “could no longer have a reasonable expectation that they were clients of [the company’s] counsel.” [6] Among other things, NAI cited the fact that CBS’s counsel had advised the full CBS board for years on matters relating to NAI’s control, including public disclosures and the annual election of directors, and therefore, the NAI-affiliated directors had no reason to believe that adversity existed on issues relating to control or otherwise.

The Court’s Decision

Following a hearing on NAI’s motion to compel, Chancellor Andre G. Bouchard issued a letter decision on July 13, 2018.

First, Chancellor Bouchard confirmed that the NAI-affiliated directors were joint clients of CBS’s counsel and had the right to unfettered access to legal advice rendered by company counsel absent implementation of “appropriate governance procedures” that put the NAI-affiliated directors on notice that they no longer could reasonably expect to be clients of CBS counsel.

Second, the Court determined that by forming special committees in 2016 and 2018, CBS employed appropriate governance procedures that made manifest to the NAI-affiliated directors that they would be excluded from privileged communications relating to special committee matters, including such communications involving company counsel. The Court therefore denied NAI’s request for access to communications between the special committee and/or committee counsel, on the one hand, and company counsel, on the other hand, finding that such communications involved company counsel “acting in aid of the process undertaken by either of the Special Committees.” The Court based this holding, in part, on the language of the authorizing resolutions and charters of the special committees, which directed “the directors, officers, employees and agents of the Corporation” to cooperate fully with the Special Committees and their advisors. The Court explained that “[i]t would make no sense to direct these persons, which plainly include outside counsel as an ‘agent’ of CBS, to cooperate fully with the Special Committees only to expose to an adverse party what they shared with the Special Committees.”

Third, the Court granted NAI’s motion with respect to communications with company counsel that were unrelated to special committee matters during the timeframe of September 30, 2016 (the date of formation of the first special committee) to May 14, 2018 (the date of the filing of the litigation). The Court explained that

“no factual basis has been identified to support the conclusion that the NAI Affiliated Directors were made aware (or reasonably should have been aware) that CBS Counsel was not representing them jointly with the other CBS directors with respect to any matter other than the matters falling within the purview of the Special Committees for which CBS Counsel provided assistance” (emphasis in original).

Fourth, with respect to communications pre-dating the formation of the 2016 Special Committee, the Court held that further development of the record was necessary. The Court stated that privilege or the lack thereof would be determined based on:

“(i) when moments of adversity may have arisen between CBS and the NAI Affiliated Directors concerning a given issue during this period and, if they did, (ii) whether the NAI Affiliated Directors were (or reasonably should have been) aware of the existence of such adversity such that they could not have had a reasonable expectation that they were clients of CBS Counsel at a given time.”

Following this ruling, CBS ultimately agreed to produce the majority of the documents sought by NAI relating to matters outside of the special committee mandate, including privileged communications made prior to the formation of any special committee.

Takeaways

The privilege dispute in the CBS-NAI litigation highlights the potentially significant implications of the joint client relationship between board members and company counsel.

  • First, all board members and counsel should presume that all directors will have the right to access communication between any director and company counsel (both inside and outside), absent manifest adversity. To the extent certain members of a board wish to potentially keep communications with counsel confidential from other board members, there should be open communication with all board members about the relevant matter and appropriate governance procedures should be implemented. For example, the board may form a special committee with a charter that makes the adversity apparent to non-special committee members, or even explicitly states that certain members of the board will not have access to privileged advice from company counsel with respect to special committee matters. If adversity is not disclosed, directors can assume that communications with company counsel will likely be accessible to all board members.
  • Second, to the extent certain board members wish to create a confidential privileged relationship without disclosure of adversity to certain other directors (e.g., if there is an allegation of potential misconduct), they should carefully consider the issues described above. In particular, it may be advisable to engage counsel other than the company’s or board’s regular counsel to maximize privilege protection, as well as to minimize potential confusion with respect to representation issues. Boards that believe there may be reason for individual board members to consult company counsel in a confidential manner on a regular basis may consider adopting measures to prospectively authorize board members to do so and explicitly provide that other board members will not have access to such communications. [7]

Endnotes

1Cleary Gottlieb was litigation and corporate counsel for NAI in the matters discussed herein.(go back)

2Kalisman v. Friedman, 2013 WL 1668205, at *4 (Del. Ch.).(go back)

3Kalisman, 2013 WL 166805, at *4; see also Schoon v. Troy Corp., 2006 WL 1851481, at *1 & n.8 (Del. Ch.).(go back)

4In re Oxbow Carbon LLC, Unitholder Litig., 2017 WL 898380, at *1 (Del. Ch.).(go back)

5Kalisman, 2013 WL 1668205, at *5; see also Oxbow, 2017 WL 898380, at *2; Kalisman v. Friedman, C.A. No. 8447-VCL, at 27 (Del. Ch. May 8, 2013) (Transcript) (adversity did not exist before corporation “openly made clear to [the allegedly adverse director] that he was no longer part of the team”).(go back)

6Id.(go back)

7Individual board members may, and often do, consult their own external counsel regarding matters related to their service on company boards and such communications of course are privileged.(go back)

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