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
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.
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Carolina Business Litigation Report, a blog for lawyers focusing on issues
of North Carolina business law and the day-to-day practice of business
litigation in North Carolina courts.
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