When Your 'Client' Is Your Company's Investor, How Is Attorney-Client Privilege Applied?

In the corporate context, the attorney-client privilege's application is rarely straightforward. When tested in court, the privilege's very existence often turns on crucial questions that may not have been considered at the time of the communication. Was the advice primarily business or legal? Which employees qualify as "clients"? Was the advice rendered to assist in the commission of a transaction that might later be viewed as fraudulent?

Now let's add another question: is management seeking legal advice to advance the best interests of the company? If not, an investor may be able to pierce the attorney-client privilege in a litigation against the company. This exception to the privilege is known as the "fiduciary exception," but is also referred to as the "good cause" exception and, in the corporate context, as the "Garner Doctrine."

Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970), cert. denied, 401 U.S. 974 (1971) extended the "fiduciary exception" to the attorney-client privilege from the traditional trustee context to corporations. Recently, New York's influential intermediate appellate court, the Appellate Division, First Department, adopted Garner's formulation of the factors for the "fiduciary exception" in NAMA Holdings, LLC v. Greenberg Traurig LLP, __ A.D.3d __, 2015 N.Y. Slip. Op. 07346 (N.Y. App. Div. Oct. 8, 2015). Corporate lawyers should take note.

The "fiduciary exception" comes into play in any litigation by investors against a company (or its agents) where the claim is that management had acted in a manner inimical to investor interests, e.g., for breach of fiduciary duty or similar wrongdoing. The doctrine has been applied to derivative actions, class actions, and individual direct claims, as well as to other types of fiduciary relationships, such as those between union negotiators and union member and between controlling shareholders and creditors, where the company is insolvent.

The "fiduciary exception" involves a balancing of important interests. See Sandberg v. Virginia Bankshares, Inc., 979 F.2d 332, 351 (4th Cir. 1992). On the one hand, society has an interest in having company managers and directors consult candidly with lawyers to obtain legal advice for the company, which requires an assurance of confidentiality. Id. at 351, 352. On the other hand, management is required to "exercise the privilege in a manner consistent with their fiduciary duty to act in the best interests of the corporation and not of...