{"id":230,"date":"2024-02-06T18:45:09","date_gmt":"2024-02-06T22:45:09","guid":{"rendered":"https:\/\/blogs.duanemorris.com\/delawarebusinesslaw\/?p=230"},"modified":"2024-02-07T08:37:56","modified_gmt":"2024-02-07T12:37:56","slug":"circle-of-trust-when-can-a-corporate-director-share-confidential-documents-with-a-stockholder-plaintiff","status":"publish","type":"post","link":"https:\/\/blogs.duanemorris.com\/delawarebusinesslaw\/2024\/02\/06\/circle-of-trust-when-can-a-corporate-director-share-confidential-documents-with-a-stockholder-plaintiff\/","title":{"rendered":"Circle of Trust: When can a Corporate Director Share Confidential Documents with a Stockholder-Plaintiff?"},"content":{"rendered":"

Stockholders who suspect mismanagement or other fiduciary misconduct generally begin by investigating via a books-and-records demand in order to articulate the allegations for the complaint in a so-called “plenary” action.\u00a0 \u00a0But, what happens if the stockholders have allies on the board itself?\u00a0 In Icahn Partners LP et al. v. Francis deSouza et al.<\/a><\/em>, C.A. No. 2023-1045-PAF (Del. Ch. Jan. 17, 2024), the Court holds that directors cannot pass confidential or privileged material to their stockholder allies, and those allies cannot incorporate the improperly acquired material, unless there is a special relationship between the director and stockholder such that they constructive share “one brain.”\u00a0 Because the director here did not have such a relationship, the sharing was improper, and the pertinent portions of the stockholders’ Complaint were stricken.<\/p>\n

In Icahn<\/em> Partners<\/em>, a parent spun off a subsidiary which raised money and then held an IPO.\u00a0 Post-IPO, the two companies agreed to a transaction by which the parent would re-acquire the subsidiary.\u00a0 European regulators issued a standstill order, which the companies disregarded, consummating the merger instead.\u00a0 European regulators issued a final ruling barring the merger, ordering divestiture, and levying nearly a half-billion euro fine for violation of the standstill order.\u00a0 Contemporaneously, entities affiliated with investor Carl Icahn owning approximately 1.4% of the company’s stock sponsored a slate of candidates for the parent’s board.\u00a0 One candidate prevailed and was seated.\u00a0 He was an employee of a different, non-stockholding Icahn affiliate.\u00a0 The new director signed on to confidentiality agreements pertaining to the secrecy of certain corporate documents and information.\u00a0 That new director used his position on the parent’s board to furnish confidential materials to the stockholding Icahn entities.\u00a0 The entities incorporated the material a complaint alleging breach of fiduciary duty against\u00a0 the parent’s other directors.\u00a0 The defendants moved to strike parts of the (under seal) complaint\u00a0 which made use of those confidential materials.<\/p>\n

The Court walked through a decades-long history of cases which create two categories of special relationships between directors and stockholders in which the director can share confidential material with the affiliated stockholder:<\/p>\n

(1) the director is designated to the board by the stockholder pursuant to contract or the stockholder\u2019s voting power; or (2) if the director also serves in a controlling or fiduciary capacity with the stockholder.<\/p><\/blockquote>\n

Outside of those categories, the Court held such sharing was improper, and that the appropriate remedy was to strike the corresponding portions of the complaint.<\/p>\n

Here, the director was elected at-large by the stockholders generally, and so\u00a0 his means of ascend did not create a special relationship under the first arm.\u00a0 Nor did his outside relationship to the stockholder-plaintiffs make him a co-fiduciary, failing the second arm.\u00a0 Instead, he was an employee of an affiliate.\u00a0 Thus, the Court held the director should not have shared the material and granted the corresponding motion to strike.<\/p>\n

This might strike a reader at first glance as a somewhat counterintuitive result.\u00a0 If a director who is beholden to a sponsoring stockholder can share documents with that stockholder in order to prosecute a corporate injury, why is that power denied to a director who has that ally\u00a0and <\/em>the support of a broader constituency? \u00a0As the Court explained, the underpinnings of the special relationship theory is that the stockholder and the director share “one brain,” such that the stockholder is in some sense constructively on the Board.\u00a0 Where the constituency supporting the insurgent director is broader, and where the director’s relationship with the key stockholder-ally is remote, that one-brain alignment is absent.\u00a0 A major stockholder needs to sponsor a sufficiently high-level fiduciary to bring itself fully into the circle of trust — and, as the Court observes, that closeness then operates in both directions, potentially constraining the stockholder’s ability to buy and sell shares of the company.<\/p>\n

So, the key points are:<\/p>\n