Monday, February 11, 2013

Privilege Upheld In Closely-Held Corporate Dispute

The Massachusetts Supreme Judicial Court has resolved the following issue:

The issue presented in this appeal is whether a closely-held corporation and its corporate counsel and accountants can assert attorney-client privilege or work product protection against directors-shareholders asserting claims against the corporation and its directors. Because there is sufficient evidence that the plaintiffs' interests are adverse to the interests of the corporation as concerns the 2007 and present litigations, we conclude that the plaintiffs are not entitled to privileged or protected information relating to the two litigations.

The court concluded that actual adversity justified maintaining the privilege:

Here, there is sufficient evidence, at least narrowly with respect to the 2007 and the present litigations, that the plaintiffs' interests are adverse to Gold Medal. Of great significance is the nature and frequency of suit by the plaintiffs against Gold Medal. The plaintiffs have brought multiple suits directly against Gold Medal in a short span of several years and have been represented by their own counsel throughout this period. That the plaintiffs' interests are adverse to those of Gold Medal is further evinced by the plaintiffs' self-interested motive in pursuing both the 2007 and present litigations. See Milroy v. Hanson, 875 F.Supp. 646, 652, S. C., 902 F.Supp. 1029 (D.Neb.1995); Lane v. Sharp Packaging Sys., Inc., supra. By the terms of their own pleadings, the plaintiffs have been pursuing a global buyout of their Gold Medal shares since approximately late 2006. They brought a direct suit solely against Gold Medal in 2007 for the inspection of corporate records to then use to value their Gold Medal shares. The settlement agreement that ended the 2007 litigation provided for an audit of Gold Medal "for the purpose of facilitating a sale of the [p]laintiffs' shares to [Gold Medal] and/or [Gold Medal's] other shareholders." The plaintiffs are interested in maximizing the price in the sale of their stock consistent with their fiduciary obligations as directors and shareholders of a close corporation to the corporation and other shareholders. See Donahue v. Rodd Electrotype Co. of New England, Inc., supra at 598. Gold Medal, as a potential buyer, is interested in minimizing the stock price, consistent with its contractual duty of good faith pursuant to the 2008 settlement agreement described earlier. Thus, the interests of the plaintiffs and Gold Medal are adverse.

The present litigation, which included direct claims against Gold Medal, similarly arose in part out of an inability to obtain requisite information to conduct a valuation of Gold Medal for the plaintiffs to then use to obtain a value-maximizing sale of their shares, albeit consistent with their fiduciary duties. As evidence of the plaintiffs' adverse interests, the judge who ruled on a separate motion filed by the plaintiffs determined that the "ultimate goal of the litigation" was "valuation of the corporations so that various family members can obtain their due." Thus, a significant motivating factor in the present lawsuit, as in the 2007 lawsuit, is the sale of the plaintiffs' Gold Medal shares at the highest possible price. See generally Milroy v. Hanson, supra; SBC Interactive, supra. This interest is adverse to Gold Medal. To permit the plaintiffs to access attorney-client privileged and otherwise protected material as concerns the 2007 and present litigations would give the plaintiffs an unfair litigation advantage.

The case is Chambers v. Gold Medal Bakery, decided February 8. (Mike Frisch)

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