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E-MailGail Weinstein is Senior Counsel, and Philip Richter and Warren de Wied are Partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Richter, Mr. de Wied, Steven Steinman, Randi Lally and Bret T. Chrisope and is part of the Delaware law series; links to other posts in the series are available here.
In connection with a stockholder activist campaign by certain Icahn-affiliated funds (the “Icahn Funds”) against Illumina, Inc., the Icahn Funds (which collectively owned less than 2% of Illumina’s stock) launched a proxy contest for three seats on Illumina’s board. One of the Icahn Funds’ nominees, who was also an employee of a different Icahn-affiliated entity, was elected to the board (the “Icahn-Affiliated Director”). The Icahn-Affiliated Director then obtained and shared confidential and privileged company information with the Icahn Funds, which the Icahn Funds used in crafting a derivative complaint against certain current and former Illumina directors.
In Icahn Partners v. deSouza, the Court of Chancery, in a letter opinion (Jan. 16, 2024), ruled that the Icahn-Affiliated Director was not entitled to share the information with the Icahn Funds. The Delaware Supreme Court, in a letter ruling (Apr. 11, 2024), rejected interlocutory appeal of the issue.
In deSouza, the Court of Chancery acknowledged that directors generally are entitled to broad access to company information. Further, the court acknowledged that it has not drawn bright-line rules relating to directors’ sharing of confidential or privileged company information. Generally, the Delaware courts have reasoned that, when a stockholder designates a director, that director acts as the stockholder’s representative to the board and the director can share the information he or she has about the company with the designating stockholder; and that, when a director is a controller or fiduciary of the stockholder, it is unrealistic that information the director has (in his or her “one brain”) could be segregated from the director’s thought process when fulfilling his or her fiduciary duties to both the company and the designating stockholder. Accordingly, a long line of cases has established that a director can share confidential or privileged company information with the stockholder(s) that designated the director to the board if: (i) the stockholder, either through its voting power or contractually, has the right to designate a director; or (ii) the director is a controller or fiduciary of the stockholder.
The Court of Chancery had reasoned that the Icahn-Affiliated Director’s “lack of a fiduciary role with the Icahn Parties and the Icahn Parties’ lack of contractual rights to designate directors to the Illumina board and limited voting power made the case distinguishable from cases holding a director may share confidential or privileged information with a stockholder.” In other words, the Court of Chancery found that the combination of the director’s nomination by the Icahn Funds and his employment by another Icahn-affiliated entity did not satisfy the requirements noted under (i) and (ii) above. With respect to (i), nomination and ultimate election of the director was not the equivalent of holding a contractual right to designate, or having the ability to exercise voting power to elect, a director. With respect to (ii), the Icahn-affiliated entity’s employment did not create a dual-fiduciary-with-just-“one-brain” situation that would have made it unreasonable to expect that information would not be shared—because the employment did not create a fiduciary relationship with or influence over the Icahn Funds and, even if it had, an employment-based fiduciary relationship would not take precedence over the fiduciary duties owed to the company by a director.
The Court of Chancery expressly rejected the Icahn Funds’ contention that recent Delaware precedents support that a company has no reasonable expectation of confidentiality with respect to the sharing of company information by a director with a stockholder that nominated the director. Also of note, the Court of Chancery found that it was not unreasonable for Illumina to expect that the Icahn-Affiliated Director would not share with the Icahn Funds the company information provided to him, given that the director had expressly agreed to abide by Illumina’s code of conduct, which prohibited the sharing of confidential information with others.
We note some complexity inherent in the court’s distinction between nominating and designating a director. In many agreements containing governance rights (including for example, activist settlement agreements), a stockholder is granted the right to designate nominees to the board, with the company bound to recommend such nominees for election. Moreover, in the recent Moelis decision, the Court of Chancery held that a right to designate nominees, when provided in stockholders agreement with the company, is facially valid, while a restriction of the company requiring it to recommend such nomination, is facially invalid (under DGCL Section 141(a)). When rights relating to directorships are granted, whether in activist settlement agreements or otherwise, the parties should keep in mind the complexities suggested by Moelis and deSouza with respect to these distinctions.
