Chancery Court Blocks Stockholders’ Push for Search of Non-Employee Directors’ Personal Email Accounts, But Orders Production of Certain Documents Withheld as Privileged, in Books and Records Action under DGCL Section 220

By Whitney Smith and Lauren Garraux

In an April 30, 2015 Memorandum Opinion, Vice Chancellor Parsons denied in part and granted in part a motion by two lululemon athletica, inc. (“lululemon” or the “Company”) stockholders to enforce a prior court order directing the Company to produce books and records relating to an investigation of potential insider trading or Brophy claims against the Company’s founder and then-chairman of the board of directors, and potential claims for mismanagement against the other directors. In doing so, the Court held that requiring the Company to search its non-employee directors’ personal email accounts for responsive documents was unwarranted, but determined that certain documents withheld as privileged should be produced pursuant to the fiduciary exception to the attorney-client privilege.

In May and October 2013, respectively, lululemon stockholders Hallandale Beach Police Officers and Firefighters’ Personnel Retirement Fund and Laborers’ District Council Construction Industry Pension Fund (collectively, “Plaintiffs”) commenced separate actions under Delaware General Corporation Law (“DGCL”) Section 220, seeking documents relating to trades of Company stock involving Dennis Wilson, lululemon’s founder and then-chairman of its board in June of 2013. In particular, the timing of the trades — which were made within days of lululemon’s then-CEO’s announcement both to Wilson and the Company’s board that she planned to resign — raised questions, even prompting the Wall Street Journal (“WSJ”) to email the Company for confirmation of certain facts for a story regarding Wilson’s trades for an article which noted their favorable timing for Wilson.

On April 2, 2014, the Court ordered the Company to produce documents relating to, among other issues, the trading plan pursuant to which the trades were made, the June 2013 trades and any inquiries by the board or its members regarding the June 2013 trades (the “April 2014 Order”). The Company subsequently produced 195 pages of documents in addition to a privilege log identifying sixteen documents that it had withheld from production under the attorney-client privilege. Plaintiffs responded by filing a motion to enforce the April 2014 Order, arguing that lululemon must (i) search the personal email accounts of its non-employee board members (who apparently used those personal accounts to conduct lululemon-related business) and to produce any relevant documents, and (ii) produce two email chains designated and withheld as privileged, pursuant to the fiduciary exception to the attorney-client privilege.

As to Plaintiffs’ first argument, the Court denied Plaintiffs’ request that lululemon be required to search its non-employee directors’ personal email accounts for documents relevant to the categories set forth in the April 2014 Order. In particular, the Court explained that even if the personal emails were within the “control” of the Company for purposes of Section 220 — an issue on which the record before the Court was “incomplete” — they would be immaterial to the Court’s decision for two reasons.

First, as the Court explained, the April 2014 Order addressed the documents that the Company was required to produce and did not address or require production by its non-employee directors. Second and, moreover, documents from the directors’ personal accounts were not “necessary” for Plaintiff’s stated, proper purpose of investigating potential insider trading or Brophy claims against Mr. Wilson and potential mismanagement claims against the other directors, as Plaintiffs had already received the critical responsive documents, including, to the extent they existed, communications between directors and lululemon employees regarding the trades at issue. The Court thus declined to broaden or re-write the April 2014 Order to include what it deemed a “substantially new and different search for books and records” than what it had authorized.

Turning to Plaintiffs’ second argument, the Court first determined that the email chains at issue — which included an email chain involving individuals from lululemon, Wilson’s personal attorney and lululemon’s attorney, relating to a response to the WSJ’s email regarding the trades, as well as an email in which lululemon’s corporate secretary and one of its in-house counsel responded to an inquiry from a lululemon director regarding the trades — were both protected by the attorney-client privilege and, therefore, were both properly withheld from production by the Company in response to the April 2014 Order. According to the Court, then, the issue was whether Plaintiff could nevertheless compel production of the email chains under the fiduciary exception to privilege as applied by the Delaware Supreme Court in Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust Fund IBEW (“Wal-Mart II”).

Specifically, in Wal-Mart II, the Delaware Supreme Court adopted Garner v. Wolfinbarger, a Fifth Circuit case that set forth a “good cause” standard for determining whether the privilege should be set aside with respect to corporate communications sought by stockholders and identified a number of factors to be considered in making that determination. Applying the Garner factors to Plaintiffs’ request — namely Plaintiffs’ stake in the Company and their bona fides in seeking disclosure of the emails (neither of which lululemon disputed), whether Plaintiffs’ claims were “obviously colorable,” whether the emails were necessary to Plaintiffs’ proper purpose and unavailable from other sources, whether the alleged wrongdoing constituted a criminal act, whether the communications related to advice concerning the litigation at hand — and considering the particular circumstances of the case and the relevant caselaw, the Court determined that Plaintiffs had met their burden of showing good cause and, therefore, that the email chains should be disclosed under Garner’s fiduciary exception to privilege. As a result, the Court ordered that lululemon produce the email chains within five business days of the date of the Memorandum Opinion.

In Re Lululemon

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