In resolving a discovery dispute in a case involving alleged mismanagement at two Pittsburgh nonprofits, the Pennsylvania Supreme Court held that § 7.13(e) of ALI’s Principles of Corporate Governance: Analysis and Recommendations provided an appropriate framework for determining, in a corporate derivative action, who holds the attorney–client privilege for the corporation, and what is the extent of the privilege, when both the derivative plaintiffs and the current management claim to be acting on behalf of the corporation.
In its opinion, the Pennsylvania Supreme Court determined that adopting the nine-factor “good cause” analysis set forth in the Fifth Circuit’s ruling in Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970), would lead to “impermissible uncertainty about protections available to corporate entities.” In doing so, it referred to its previous ruling on the matter in Cuker v. Mikalauskas, 692 A.2d 1042 (Pa. 1997), in which the court adopted §§ 7.02-7.10 and 7.13 of ALI’s Principles of Corporate Governance: Analysis and Recommendations. Section § 7.13(e) specifically addresses attorney–client privilege as it relates to motions to dismiss derivative lawsuits.
In accordance with the Principles’ approach, the opinion said, plaintiffs in derivative lawsuits are entitled to copies “of related legal opinions received by the board” in connection with its investigation into claims of purported impropriety. The court explained that § 7.13(e) permitted a plaintiff in a derivative action to challenge the validity of a corporation’s decision not to pursue derivative litigation, and allowed limited discovery, including discovery of some privileged material that would not otherwise be permissible in standard litigation, while protecting the corporation’s current management team through the application of the business-judgment rule.
Read the full opinion here.