Delaware Federal and State Courts Disagree About a Key Privilege Waiver Issue

April 5, 2023

Under some arrangements, major shareholders appoint directors to companies those shareholders partially own. Does such a company waive its privilege by disclosing its privileged documents to a designating shareholder’s employees (other than its designated board members)? In In re Sanchez Energy Corp., Case No. 19-34508, Jointly Administered, Ch. 11, 2022 Bankr LEXIS 3507, at *8 (Bankr. S.D. Tex. Dec. 12, 2022), a Texas federal court analyzed under Delaware law whether a company waived its privilege by disclosing privileged communications to employees of two large shareholders who were “entitled to designate two of the three members of [the company’s] board.”

The court first noted that a Delaware bankruptcy court dealing with waiver in the other direction “recently held that a designating shareholder may waive privilege upon sharing information with its designee.” Id. at *9. That decision disagreed with a 2013 Delaware Chancery Court decision holding that a “designating stockholder is entitled to the privileged communications to which its designee directors is entitled” without waiving the company’s privilege. Id. at *10.

The court applied federal common law in adopting the Delaware bankruptcy court’s reasoning — “ha[ving] no reason to believe that a designating shareholder is entitled to the privileged information of its designated board member.” The court thus ordered the company’s designated board members to produce privileged documents that they had shared with their fellow designating shareholder’s employees (who were unaffiliated with, and thus “third parties,” to the company).