Topic: Privilege

Delaware Chancery Court Allows Disclosure of Privileged Information to LLC Members Under Garner Fiduciary Exception

By Scott Waxman and Claire White

In De Vries v. Del Mar, L.L.C., two minority limited liability company members of Del Mar, L.L.C. (the “Company”) sought to compel disclosure of privileged information relating to the settlement of a $3.0 million loan to the Company, the transfer of the Company’s primary asset to the lender in post-settlement negotiations, and potential mismanagement and self-dealing by the managing member of the Company, Baja Management, LLC (“Baja”), and its president and sole managing member, Kenneth Jowdy (“Jowdy”). The Court held that the plaintiffs demonstrated sufficient “good cause” to compel inspection of privileged books and records of the Company related to the post-settlement events under the Garner doctrine of the Fifth Circuit Court of Appeals, adopted by the Delaware Supreme Court in Wal-Mart Stores v. Indiana Electrical Workers Pension Trust Fund IBEW, No. 614, 2013 (Del. July 23, 20

The Company was formed for the principal purpose of owning and developing a hotel, golf course and residential properties in Baja California, Mexico, and its main asset consisted of 9,238 acres of undeveloped land, valued at $68.9 million (the “Property”). Baja, the Company’s majority and managing member, owned 93% of the Company’s membership interests, and the remaining interests were held by various minority members who invested $500,000 each in exchange for a 0.5% interest in a private placement round in 2005. The Company obtained a secured loan of $3.0 million from a “hard money” lender in 2006, but failed to raise substantial investment funds for full development of the Property. Jowdy, the sole managing member of Baja, personally guaranteed the loan. In 2010, the Company defaulted on the loan, and the Company and Jowdy executed confessions of judgment for the full amount of the loan (and interest). Following settlement negotiations, and the Company’s inability to satisfy the judgments with further financing, the Company agreed to transfer the Property to the lender in lieu of the lender recording the judgments against the Company and Jowdy.

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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.

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