Thursday, March 9, 2023

One Brain And the Circle Of Confidentiality

The Delaware Court of Chancery rejected an assertion of attorney-client privilege

While Ira Weiss was serving as a director of FairXchange, Inc. (“FairX” or the “Company”), Coinbase Global, Inc. made an acquisition proposal. Weiss wanted to retain an investment banker and explore alternatives. The other two members of the Company’s board of directors (the “Board”) wanted to pursue a transaction with Coinbase. They began excluding Weiss from the deal process, and they later arranged for a group of preferred stockholders to remove him from the Board.

Weiss was a partner in a venture capital firm. Two investment funds sponsored by the firm had made significant investments in the Company. While serving as a director, Weiss also managed the funds. He could not avoid sharing information about the Company with the funds, because Weiss (like all humans) has only one brain. Humans cannot partition their brains so that they only use particular knowledge for particular purposes. Weiss drew on a unitary store of knowledge when carrying out his dual roles as corporate director and fund manager.

After the Coinbase transaction closed, the funds filed this appraisal proceeding. During discovery, the Company asserted the attorney-client privilege to withhold information created during Weiss’s tenure as a director. The funds have moved to compel production of the information.


Since 1987, Delaware law has treated the corporation and the members of its board of directors as joint clients for purposes of privileged material created during a director’s tenure. Joint clients have no expectation of confidentiality as to each other, and one joint client cannot assert privilege against another for purposes of communications made during the period of joint representation. Under this longstanding precedent, a Delaware corporation cannot invoke privilege against the director to withhold information generated during the director’s tenure. All of the joint clients were within the circle of confidentiality when the privileged communications were made, so there is no privilege to invoke.

Since 1992, Delaware law has recognized that when a director represents an investor, there is an implicit expectation that the director can share information with the investor. Many investors appoint director representatives to monitor corporate performance—think of controlling stockholders, venture capital firms, and private equity firms—and information sharing is part of that process. Information sharing necessarily happens when a director representative serves dual roles because, to reiterate, a human has only one brain. Of course, director representatives use and share information at their own risk, and they can be liable for breach of fiduciary duty if they use the information or permit it to be used for an improper purpose. The bottom line for the attorney-client privilege is that under the joint client approach, the investor presumptively joins the director within the circle of confidentiality, and the corporation cannot invoke the privilege against the investor for materials created during the director’s tenure.

Three recognized methods exist by which a corporation can alter these default rules. First, as frequently happens, the parties can address the matter by contract, such as through a confidentiality agreement. Second, the board of directors can form a committee that excludes the director, at which point the committee can retain and consult confidentially with counsel. Third, once a sufficient adversity of interests has arisen and becomes known to the director, the director cannot reasonably rely on corporate counsel as to the matters where the interests of the director and corporation are adverse. At that point, the corporation can assert the attorney-client privilege as to the director. If a corporation believes that a sufficient adversity of interests exists, the corporation can put the director on notice of that fact, enabling the director to retain his own counsel and, if he wishes, call the question of information access through litigation.

In this case, the Company did not take any of the steps necessary to preserve the privilege. Weiss and the funds were inside the circle of confidentiality during his tenure as a director. Without the expectation of confidentiality on which the attorney-client privilege depends, the Company has no basis for asserting the privilege against the funds in this action. Their motion to compel is granted.

(Mike Frisch)

Privilege | Permalink


Post a comment