Attorney-Client Privilege

Over the last several years, the books-and-records proceeding and its corresponding shareholder rights of inspection seem to have entered a bit of renaissance period in the courts. We here at New York Business Divorce have reported on at least nine decisions primarily addressing the topic since September 2014, going on record to proclaim the phenomenon as a “boost” for the summary proceeding, by which minority owners in closely-held businesses can get a window into the management and operation of the companies from which they’ve been shut out. We’ve even gone so far as to suggest that books-and-records proceedings may be “on a roll” of late, both in terms of an expansion what constitutes a “proper purpose” for bringing the proceeding, as well as in terms of the scope of information attainable.

That trend, at least with respect to the frequency with which issues related to inspection rights are being litigated, appears to be continuing into 2018. What follows are summaries of three of this year’s more notable decisions addressing inspection rights – all from Manhattan Supreme Court, as it happens.

But first, a quick refresher on the subject matter at hand… Continue Reading Inspection Rights, Oral Operating Agreements, and Other Pop-Diva Delights

A corporate director’s right of access to corporate books and records, including legal advice from corporate counsel, has been described by courts as “absolute” and “unqualified,” consistent with the fulfillment of a director’s fiduciary duty to monitor and promote the corporation’s business interests.

In contrast, under statute and common law, a shareholder’s right of access may be limited to basic information concerning corporate finance and ownership. In addition, the shareholder has no attorney-client relationship with corporate counsel that would enable access to privileged communications between counsel and the corporation’s directors and executives.

The distinction between director and shareholder rights of access to communications with corporate counsel gets blurred in closely held corporations — especially smaller ones — where the directors and shareholders often are one and the same. When dissension and litigation erupt between antagonistic shareholder/director factions, courts have the difficult task of deciding whether communications with corporate counsel containing legal advice concerning the dispute must be disclosed to a shareholder/director asserting, for example, appraisal rights following a merger and/or derivative claims for breach of fiduciary duty.

A pair of appellate decisions by courts in New York and Massachusetts recently addressed the issue. In both cases, the appellate courts reversed lower court orders requiring disclosure of otherwise-privileged communications with corporate counsel in suits brought by dissident shareholder/directors. In both cases, the appellate courts determined that the plaintiffs were not entitled to the disclosure sought because their interests were “adverse” to the corporation in regard to the subject communications with counsel. Let’s take a closer look. Continue Reading Can “Adverse” Shareholder/Director Access Privileged Communications With Corporate Counsel?

A recent decision by Nassau County Commercial Division Justice Stephen A. Bucaria in Vecchio v. Post Road Entertainment, LLC, Short Form Order, Index No. 187/08 (Sup Ct Nassau County May 1, 2012), draws attention to an issue that regularly arises in litigation among co-owners of closely held companies: Does attorney-client privilege protect from disclosure to the non-controlling owner the activities, work product and communications of the company counsel?

It’s a complex and nuanced issue, the outcome of which in any given case will depend on the specific factual circumstances. In some cases, the issue may arise as to outside company counsel who was involved in relevant events both before and after the dispute arose, and who represents the company under the direction of the controlling owners in the litigation against the non-controlling owner. The analysis under those circumstances may differ from a situation “merely” involving requested discovery of the company’s outside corporate counsel who is not involved in the litigation.

Vecchio involves the latter situation. In 2004, the plaintiff, Michael Vecchio, and the three individual defendants formed a New York limited liability company called Post Road Entertainment, LLC for the purpose of operating bars and restaurants. Vecchio allegedly provided $850,000 financing, and two of the defendants operated the business. The members also entered into a buy-sell agreement including a right of first refusal and a redemption of membership interest for $1.5 million upon death, funded by a company-owned life insurance policy.

Continue Reading Obtaining Discovery of the Company Lawyer in Business Divorce Cases: Privileged or Not?

Over at the newly revived and highly recommended Unincorporated Business Law Prof Blog, there’s news of a recent decision by a U.S. District Court in Nevada holding under federal law that for purposes of attorney-client privilege, a limited liability company is more akin to a corporation than a partnership and on that basis, ruling that communications between the LLC’s manager and the LLC’s counsel need not be disclosed to an LLC member and former manager who brought an action against the LLC.  The case, Montgomery v. eTreppid Technologies, LLC, 2008 WL 1826818 (D. Nev. Apr. 18, 2008), appears to be the first published decision on this issue.

The privilege issue frequently arises in business divorce litigation where, typically, a non-controlling faction seeks access to the controlling faction’s communications with attorneys who’ve worked for, and been paid by, the company.  The issue tends to get further complicated by allegations that the legal work for the company in fact is being done for the interests of the controlling faction.

Montgomery involved a manager-managed LLC with a board-like management structure, hence an easier comparison to the corporate form.  It’ll be interesting to see how federal and state courts grapple with the issue in other cases, and whether courts will distinguish Montgomery in cases involving member-managed LLCs.