A broadly worded defense in a case challenging the sale of a company resulted in a waiver of the attorney-client and work product privileges last week, in Richardson v. Frontier Spinning Mills, Inc.
Richardson claimed that the company had improperly structured its sale so that non-employee shareholders like him were paid less for their stock than the shareholders who were employed by Frontier and that the company had failed to disclose material facts regarding the transaction. The company defended by asserting that it had relied on the advice of its corporate counsel in how the sale was structured.
It is not unusual for counsel defending corporate directors to raise an "advice of counsel" defense because G.S. §55-8-30 says that directors may rely upon information provided by "[l]egal counsel, public accountants, or other persons as to matters the director reasonably believes are within their professional or expert competence" in discharging their duties as directors.
According to the Business Court, there is "ample authority" that the raising of such a defense results in a waiver of the attorney-client privilege. Given that the scope of waiver is often a "thorny issue" (Op. Par. 9), a defense relying on Section 55-8-30 should be carefully worded. The defense before Judge Jolly in the Richardson case stated that
if it is determined there was illegal disparate treatment of the "Outside Shareholder[s]" and the "Inside Shareholders" or insufficient material disclosure in the Stock Purchase Agreement and otherwise, which the Defendants specifically deny, then Defendants assert that in the discharge of any legal responsibilities with respect to these allegations, they relied on the advice of counsel.
In his ruling, the Judge said that the word "otherwise" was "so broad as to be elusive of clear and reasonable definition." Op. at Par. 8. He said also that "[s]uch broad language makes it extremely difficult for the court to define fairly and reasonably where any resulting waiver of the attorney-client privilege begins and ends." Op. ¶10.
He held that the waiver covered any communications between the defendants and their counsel that took place before the closing of the sale and which reasonably related to a broad range of matters involving the sale.
The waiver extended to the work-product of counsel, because the statutory defense applies only if the director reasonably relies on the legal advice. Judge Jolly relied on cases outside of North Carolina for the proposition that:
fairness dictates the necessity for an examination of the underlying good faith and reasonableness of the advice itself, including the circumstances surrounding issuance of the legal opinion, and that relevant work product therefore loses its privilege protections.
That exposed the lawyers to having to produce all documents reflecting communications between the law firm’s primary counsel to the company and other lawyers at the law firm.
Judge Jolly said that "it would not have been difficult" to limit the scope of the waiver by limiting the wording of the defense. Op. ¶10. That might be easier said than done. Waiver is a slippery slope once you start heading down it. There’s no telling where you might end up.