White Collar & Government Investigations Practice - Delaware Court Holds Counsel Privileges Waived by Reporting Results of an Internal Investigation to Conflicted Directors
The Delaware Chancery Court has held that a corporation lost its authority to control the counsel privileges when its special investigating committee reported the results of its investigation to Board members who were involved in the
subject matter of the investigation, and their counsel. Ryan v. Gifford, WL 4259557 (Del. Ch. Nov. 30, 2007).1 The company’s announcement apparently exonerating directors in an 8-K and its
more detailed private report to NASDAQ implying the opposite were also factors in denying the company’s privilege claim.
Initially, it appears that the Delaware court’s Ryan decision directly conflicts with a basic tenet of the Supreme Court holding in Upjohn v. United States, 449 U.S. 383 (1981) that a company may retain counsel
privileges relating to the underlying material of an internal investigation even after reporting the results to regulatory and law enforcement authorities. Closer analysis indicates, however, the evolution, as well as the complication,
of the law and practice of internal investigations.
In both Ryan and Upjohn, the company authorized an internal investigation with the assistance of outside counsel. Counsel collected and reviewed documents, interviewed dozens of witnesses and kept notes of
the interviews. The responsible company official and assisting counsel reported the findings and conclusions of the investigation to the Board, to securities regulators and to the public. And in each case, directors either
knew of, or were allegedly involved in the matters under investigation.
The different results in Ryan and Upjohn are attributable to the refinement since Upjohn of the separate roles of the Board of Directors, special committees and investigating counsel, particularly under
Delaware law. The Delaware court proceeded on the now developed principle that an internal investigation is a reliable and effective function for the company and its shareholders, but only where the investigating committee’s
conduct and conclusions are truly, and not merely formally, independent of individual interests of corporate personnel. As the Board in Ryan did not give its special committee the full authority to act independently
for the company under the Delaware Supreme Court’s Zapata decision,2 the committee’s actions manifested a lack of independence and an apparent intent to favor directors subject to its investigation.3
4 Note that Ryan was decided under Delaware law and rules, and Upjohn was decided under the Federal Rules of Evidence and the Federal Rules of Civil Procedure.