Special litigation committee’s report may enjoy ACP or WP protection

Special litigation committee’s report may enjoy ACP or WP protection

In derivative action a special litigation committee’s report may be entitled to attorney-client privilege or work product protection. So the Indiana Supreme Court decided in TP Orthodontics, Inc. v. Kesling, 15 N.E.3d 985 (Ind. 2014).

This was a derivative action pursuant to Indiana Code § 23-1-32-4 in a closely-held corporation. Shareholders had proposed to pursue a derivative claims against the president but a special litigation committee had decided against it.

Ind. Code § 23-1-32-4(a) permits a corporation’s board of directors to establish a special litigation committee “consisting of three (3) or more disinterested directors or other disinterested persons to determine: (1) whether the corporation has a legal or equitable right or remedy; and (2) whether it is in the best interests of the corporation to pursue that right or remedy. “Once an SLC has determined that pursuit of a derivative claim would not be in the corporation’s best interests, a shareholder has only two means of overcoming this conclusive statutory presumption—either by demonstrating that the SLC was not “disinterested” as defined in Ind. Code § 23-1-32-4(d) or that the SLC’s determination “was not made after an investigation conducted in good faith.” Ind. Code § 23-1-32-4(c).

The shareholders “contend[ed] that they must have access to the entire SLC report in order to carry their statutory burden of demonstrating the SLC’s lack of a good faith investigation” and filed a motion to compel production of the report. The trial court granted the motion; the Indiana Court of Appeals affirmed. The Indiana Supreme Court reversed.

The Court stated: “To invoke attorney-client privilege, the invoking party must “establish by a preponderance of the evidence (i) the existence of an attorney-client relationship and (ii) that a confidential communication was involved.” The Court found that “The SLC satisfies both requirements ”. In addition, the report may be protected as “work product prepared in anticipation of litigation”

In conclusion, the Indiana Supreme Court remanded to the trial court to evaluate whether the report contained privileged information and work-product.

Full decision here: http://www.in.gov/judiciary/opinions/pdf/09032014SHD.pdf

For more information contact Nathan M. Crystal.