Non-Inspection Inspection Rights in Delaware: Espinoza v. Hewlett-Packard (Part 3)

We are discussing the oral ruling in Espinoza v. Hewlett-Packard, an inspection rights case where the Plaintiff sought a Report written by a law firm about matters involving Mark Hurd, the former CEO.

The court was in a bind.  Plaintiffs had alleged a proper purpose and a credible basis.  While this does not mean shareholders are entitled to undertake a fishing expedition, it does generally mean that they are entitled to see what the board used to make its ultimate decision.  The Report was considered by the Board and was, therefore, presumptively subject to disclosure.

The court first characterized the report as "privileged," effectively elevating the burden on Plaintiff in acquiring the document.  The basis for finding the report privileged?  Mostly because it was prepared by a law firm.  As the court described: 

• I begin from the premise that absent a sufficient reason not to apply the attorney-client privilege, that privilege would attach to the interim report. It was a report created by outside counsel, Covington & Burling, in the course of its representation of HP at the behest of HP's board. Covington created the report to communicate the status of its investigation into the allegations in the Allred letter and to provide interim legal advice to the HP board regarding Fisher's allegations. Moreover, it was presented to an executive session of the nonemployee members of the board in a confidential session and was not provided to anyone else besides the board, counsel, counsel's consultants, or HP personnel supporting the HP legal department.

Yet whatever the delicacies in this area, one thing is absolutely clear:  The mere fact that a law firm prepares a report following an investigation does not automatically entitled it to protection as privileged.  Indeed, if anything, there is a presumption the other way.  See Thomas R. Mulroy & Eric J. Munoz, The Internal Corporate Investigation, 1 DePaul Bus. & Comm. L.J. 49 (Fall 2002) (noting that investigation designed to provide "legal advice" could be privileged but that the privilege "will not apply if such counsel is hired mainly to investigate and report to the board of directors, or as one court put it, if special counsel is engaged 'not for their legal acumen but for their skill as investigators.'"); see also Allied Ir. Banks, p.l.c. v. Bank of Am., N.A., 240 F.R.D. 96 (SD NY 2007) (investigatory report created with the assistance of law firm not covered by work product privilege).

Nonetheless, even with the elevated burden that came with the characterization as privileged, Plaintiff seemingly had a strong case.  After all, to the extent Hurd's departure was tested under the business judgment rule, it was a matter of process.  Process for the most part required an examination of the informed nature of the board's decision.  To do so meant looking at the information used by the board during its deliberations.

The court, however, concluded that in weighing the disclosure of the Report, Plaintiff had not demonstrated that he needed it.  In effect, the Report was redundant.   

• But because it is in many of these other underlying documents at this stage at least, plaintiff has not demonstrated that it also needs the report, the interim report, of Covington to complete the type of investigation that is contemplated by Section 220.

In making this conclusion, the court emphasized the information already turned over to the Plaintiff.  This included board minutes, expense reports submitted by Hurd, compensation records for the consultant, copies of certain HP policies, the separation agreement, the Letter and certain expense reports.  In addition, Plaintiff had a number of public documents (statements by HP officials, transcripts of conferences with investors, etc). As the court described: 

• These matters, as well as the fact that the plaintiff has the underlying documents and can make his own assessment as to how serious the wrongdoing is based on his -- what he has obtained in the 220 action, as well as the minutes of the board and the fact that through those minutes he discovered the existence of the interim report that we're talking about today, all show that the plaintiff has extensive information in this area. It has enough information potentially to draw its own conclusions about what the board should have done.

The court, however, confuses the substantive behavior with the process used by the board.  It is true that Plaintiff probably has enough information to raise concern over the substance of the board's decision.  The fact that multiple derivative suits were filed (not by Plaintiff, however) over the incident illustrates that well enough.

But a breach of fiduciary duty is mostly about a failure of process.  For there to be evidence that this occurred, one must know what the board did and what the board knew.  Providing primary materials (the expense reports and other underlying documents) gives no insight into the process used by the board nor does it establish that the board even used these materials. 

The minutes of the meetings tack in that direction but, as everyone knows, they are likely to have been thoroughly "advised" and unlikely to provide any useful insight into the board's decision making process.  See Mercier v. Inter-Tel (Del.), Inc., 929 A.2d 786, 797 (Del. Ch. 2007) ("The meeting was clearly and thoroughly "advised," shall we say, and the meeting minutes do not reflect the obvious reality driving the need for the meeting: the Merger was going down to defeat the next day.").

The opinion demonstrates that shareholders seeking to invoke their inspection rights are subject to a series of all but impossible hurdles.  Proper purpose typically (although in at least two cases, not always) means some type of mismanagement.  Mismanagement in turn must be supported by a credible basis.  Finally, even when these standards are met, the court has and will use its discretion to deny access to documents that are relevant to shareholders.  They may own the company but that does not mean shareholders are entitled to information that owners would ordinarily want to receive.  

Primary materials can be found at the DU Corporate Governance web site.