IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

Transcription

1 1 IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE ERNEST ESPINOZA, : : Plaintiff, : : v : Civil Action : No VCP HEWLETT-PACKARD COMPANY, : : Defendant. : Chancery Court Chambers New Castle County Courthouse 500 North King Street Wilmington, Delaware Friday, March 25, :39 p.m BEFORE: HON. DONALD F. PARSONS, JR., Vice Chancellor TELEPHONIC RULINGS OF THE COURT FROM ORAL ARGUMENT ON PLAINTIFF'S DEMAND FOR THE INTERIM REPORT OF COUNSEL, INTERVENOR MARK V. HURD'S MOTIONS TO STAY THE COURT'S ORDER PENDING APPEAL AND FOR ENTRY OF FINAL JUDGMENT PURSUANT TO RULE 54(b) OR FOR LEAVE TO PURSUE APPEAL OF COLLATERAL ORDER New Castle County Courthouse 500 North King Street - Suite Wilmington, Delaware (302)

2 2 1 APPEARANCES: (via speakerphone) 2 CARMELLA P. KEENER, ESQ. Rosenthal, Monhait & Goddess, P.A. 3 -and- FELIPE J. ARROYO, ESQ. 4 GREGORY E. DEL GAIZO, ESQ. of the California Bar 5 Robbins Umeda LLP for Plaintiff 6 PETER J. WALSH, JR., ESQ. 7 STEPHEN C. NORMAN, ESQ. R. CHRISTIAN WALKER, ESQ. 8 Potter, Anderson & Corroon LLP -and- 9 STEVEN M. SCHATZ, ESQ. KATHERINE L. HENDERSON, ESQ. 10 of the California Bar Wilson, Sonsini, Goodrich & Rosati, P.C. 11 -and- MARC J. SONNENFELD, ESQ. 12 JILL M. BAISINGER, ESQ. of the Pennsylvania Bar 13 Morgan, Lewis & Bockius LLP for Defendant 14 ROLIN P. BISSELL, ESQ. 15 JAMES M. YOCH, JR., ESQ. Young, Conaway, Stargatt & Taylor LLP 16 -and- KEITH PAUL BISHOP, ESQ. 17 AMY WINTERSHEIMER FINDLEY, ESQ. of the California Bar 18 Allen Matkins Leck Gamble Mallory & Natsis LLP for Intervenor Mark V. Hurd

3 3 1 THE COURT: All right, Counsel. 2 MS. KEENER: Carmella Keener, 3 Rosenthal, Monhait & Goddess on behalf of the 4 plaintiff. 5 MR. ARROYO: Felipe Arroyo, Robbins 6 Umeda, also on behalf of the plaintiff. 7 MR. WALSH: This is Pete Walsh. And 8 with me is Steve Norman on behalf of Hewlett-Packard. 9 Also on the call is Marc Sonnenfeld, Steve Schatz, and 10 Katherine Henderson, all for Hewlett-Packard. 11 MR. DEL GAIZO: Gregory Del Gaizo from 12 Robbins Umeda for the plaintiff. 13 MR. BISSELL: Rolin Bissell and James 14 Yoch of Young Conaway for Mark Hurd. Also on the line 15 from the Allen Matkins firm, Keith Bishop and Amy 16 Wintersheimer. 17 UNIDENTIFIED SPEAKER: And I believe 18 Jill Baisinger from Morgan Lewis is also on the phone 19 for Hewlett-Packard. 20 MS. BAISINGER: Yep. 21 THE COURT REPORTER: Thank you. 22 THE COURT: All right. Okay. Now I'm 23 going to have to ask counsel to bear with me as we 24 recreate the record.

4 4 1 I apologize to counsel for the fact 2 that I was a few minutes late here in starting this 3 call, and I appreciate all of their forbearance in 4 making themselves available. 5 I also noted that we had received a 6 call from a reporter from Dow Jones who wanted to 7 participate in the telephone call. And I explained 8 that it has been my policy, and I think the policy of 9 the Court, that when we're talking about telephone 10 conferences in our civil actions, that it's not 11 practicable or feasible for us to have members of the 12 public or members of the press listen in on the calls. 13 And that's because we often have a number of members 14 of the public and of the press who would be 15 interested. And it just logistically becomes 16 unworkable for us. 17 But a transcript will be made 18 available. I'm proceeding on the assumption that the 19 transcript will not be a confidential document. If 20 anyone thinks differently, it's important that they 21 raise that with me before we get off the phone this 22 afternoon. 23 Having made those preliminary 24 comments, I start with the ruling on this Section 220

5 5 1 action. 2 This is a corporate books and records 3 case under 8 Delaware Code Section 220. The 4 plaintiff, Espinoza, is the beneficial owner of HP 5 common stock. Defendant Hewlett-Packard, or HP, is a 6 Delaware corporation and a global provider of 7 products, technologies, software solutions, and 8 services to individual consumers, small and 9 medium-size businesses and large enterprises, 10 including customers in the government, health, and 11 education sectors. 12 Mark Hurd, a third-party intervenor in 13 this action, is the former CEO, president, and 14 chairman of the board of directors of HP. 15 On June 29th, 2010, Hurd received a 16 letter at HP's Palo Alto office from attorney Gloria 17 Allred, apprising him of a number of allegations her 18 client, a former HP contractor named Jodie Fisher, was 19 making against him and Hewlett-Packard relating to 20 sexual harassment and corporate misconduct. And I'll 21 refer to that as "the Allred letter" or "letter." 22 Hurd promptly turned the letter over to and sought 23 legal advice from HP's executive vice president and 24 general counsel, Michael Holston.

6 6 1 Upon being apprised of the letter, the 2 HP board directed that an investigation be made into 3 the allegations in the letter. They retained the law 4 firm of Covington & Burling LLP to conduct the 5 investigation. As the investigation proceeded, 6 Covington apprised the board of its progress. And 7 according to HP, all communications between Covington 8 and the board were kept strictly confidential. 9 On July 28th, 2010, Covington 10 presented an interim report to the board, which I'll 11 refer to as "the report" or "the interim report," 12 which contained the results of its investigations, 13 findings of possible violations and potential 14 disciplinary options for HP as regards Mr. Hurd. 15 After having received the report and discussing the 16 situation at several meetings of an executive session 17 of the nonemployee members of the board of directors, 18 the HP board requested Hurd's resignation, but they 19 did not terminate him for cause. In doing so, the 20 board explained that Hurd's conduct relating to Fisher 21 "demonstrated a profound lack of judgment." And based 22 on the circumstances and their knowledge of the facts 23 relating to Fisher's allegations, the board concluded 24 that "it would be impossible for Hurd to be an

7 7 1 effective leader moving forward and that he had to 2 step down." 3 Several days later, on August 6th, HP 4 publicly announced Hurd's departure from the company. 5 In a public conference call that day, Holston 6 explained to investors that the board based its 7 decision to seek Hurd's resignation on a number of 8 reasons, including that it found that Hurd had a close 9 personal relationship with an HP contractor which was 10 never disclosed to the board. There were numerous 11 instances where the contractor received compensation 12 or expense reimbursement where there was no legitimate 13 business purpose for doing so. There was a systematic 14 pattern where Hurd directly or indirectly submitted 15 inaccurate expense reports that "intended to or had 16 the effect of concealing his personal relationship 17 with the contractor" and that Hurd disregarded HP's 18 values of trust, respect, and integrity. 19 The effect of these findings, 20 according to the HP board, was that while Hurd did not 21 violate HP's sexual harassment policy, he did violate 22 HP's standards of business conduct. HP also announced 23 on August 6th that it and Hurd had entered into a 24 separation agreement and release, which I'll refer to

8 8 1 as "the agreement," under which Hurd was entitled to 2 receive certain severance benefits, including, among 3 other things, a severance payment of $12.2 million and 4 various stock option rights, which I'll collectively 5 refer to as "the severance package." In consideration 6 for these benefits, HP received, among other things, a 7 full release of claims by Hurd against HP, continuing 8 confidentiality commitments from Hurd, a commitment to 9 cooperate with HP after Hurd resigned, and Hurd's 10 agreement not to disparage HP or its affiliates. 11 According to the plaintiff, the 12 estimated value of Hurd's severance package as 13 determined by the Financial Times was between 35 and 14 $40 million. Plaintiff contends that had HP 15 terminated Hurd for cause, it would not have been 16 required to pay any severance to Hurd. 17 Four days after HP announced Hurd's 18 resignation and his receipt of the severance package, 19 the first of eight stockholder suits was filed, 20 alleging that the HP board committed waste or 21 otherwise breached its duties to HP by approving the 22 separation agreement. Three of those suits were filed 23 in California state court, four others in California 24 federal court, and one in this Court by another

9 9 1 plaintiff by the name of Lawrence Zucker. 2 The California state actions were 3 consolidated and stayed pending resolution of the 4 federal California actions. The California federal 5 actions were consolidated in the Northern District of 6 California before Judge Ware; and the Delaware action, 7 which was filed on November 24th, 2010, after the 8 plaintiff made a demand on HP pursuant to Section and received essentially the same books and records 10 produced to Espinoza in this action, has also been 11 stayed, as I understand it. 12 On August 17th, 2010, plaintiff 13 Espinoza in this case made a demand pursuant to 14 Section 220 to inspect certain of HP's books and 15 records related to Hurd's departure. Plaintiff's 16 stated proper purpose in doing so was to "investigate 17 corporate mismanagement, wrongdoing and waste by" the 18 HP board and Hurd. In particular, the plaintiff 19 brings his demand for the purpose of investigating 20 what he alleges appear to be improper conduct by 21 certain officers and directors of HP relating to 22 Hurd's resignation. In this action the plaintiff 23 further clarified that his alleged proper purpose 24 concerned his reason to believe that the board's

10 10 1 decision to agree to the separation agreement, which, 2 according to plaintiff, is extremely lucrative, was in 3 breach of the board members' fiduciary duties and 4 amounted to a waste of HP's assets. 5 The Section 220 demand listed 10 6 specific demands for inspection, including -- and I'll 7 just list one of them -- which was for "All books and 8 records concerning the internal investigation into the 9 independent contractor's sexual harassment 10 allegation(s) against Mr. Hurd, including, without 11 limitation, all minutes of any meeting of the Board or 12 committee of the Board, any attachments to such 13 minutes, any materials provided or presented to the 14 Board or committee thereof concerning the 15 investigation, and the letters sent on or about 16 June 29, 2010, informing [HP] of the allegations." 17 On September 2, 2010, HP agreed to 18 produce certain categories of nonprivileged documents 19 it deemed responsive to the Section 220 demand. These 20 documents included board minutes relating to its 21 investigation into the allegations against Hurd, its 22 consideration of whether to terminate Hurd, and the 23 negotiation of Hurd's separation agreement. In 24 addition, HP agreed to produce certain expense reports

11 11 1 submitted by or on behalf of Hurd, corporate records 2 relating to Fisher's compensation, copies of HP's 3 guidelines and policies concerning conflicts of 4 interest and HP's standards of business conduct, HP's 5 severance/bonus plan, copies of guidelines and 6 policies relating to reimbursement of expenses 7 incurred by Hurd, the separation agreement, Hurd's 8 assistant's expense report, and the Allred letter. 9 After receiving these materials, the 10 plaintiff's counsel asked HP to turn over a copy of 11 the interim report of Covington. HP refused, arguing 12 that the report was protected from disclosure by the 13 attorney-client privilege and attorney work product 14 doctrine. As the parties were unable to resolve this 15 dispute, plaintiff filed this Section 220 action, 16 seeking access to the interim report. 17 On January 20, 2011, HP announced that 18 it had appointed five new members to its board and 19 that four of its current directors would not seek 20 reelection. In addition, HP appointed a special 21 committee of independent directors to investigate the 22 alleged wrongdoing asserted by the plaintiffs in the 23 various derivative actions noted previously. And I 24 should say that those derivative actions include

12 12 1 claims that are similar to the type of wrongdoing 2 that's alleged by the plaintiff as a possibility at 3 least in this action. 4 I emphasize that the plaintiff, 5 Espinoza, has filed an action under 220. He has not 6 committed one way or the other as to whether he will 7 file a class derivative action based on whatever he 8 learns here. And, of course, there's no requirement 9 that he do so. 10 The investigation of the independent 11 committee regarding the eight derivative actions is 12 reportedly ongoing. 13 Turning to the procedural history of 14 this case, the plaintiff filed his 220 complaint on 15 November 18th, Soon thereafter I granted Hurd's 16 motion to intervene in this action to assert his 17 position that the Allred letter, which was attached as 18 an exhibit to the complaint, should be kept under 19 seal. On March 17, 2011, I denied Hurd's motion and 20 ordered that the Allred letter be unsealed, subject to 21 certain specific exceptions pertaining to or 22 redactions pertaining to Hurd's family and his 23 relationship with them. In all, however, most of the 24 eight-page letter would be produced, with the

13 13 1 exception of perhaps half a page or something like 2 that. 3 On March 22 Hurd moved for entry of a 4 final judgment pursuant to Rule 54(b) or for leave to 5 pursue an appeal of a collateral order based on this 6 recent ruling I made as to the Allred letter. Hurd 7 also moved to stay this Court's order pending 8 resolution of his appeal to the Delaware Supreme 9 Court. 10 Meanwhile, Espinoza and HP fully 11 briefed Espinoza's Section 220 claim for the interim 12 report, and I heard argument on that claim earlier 13 today. 14 This oral ruling constitutes my 15 decision on Espinoza's Section 220 claim and addresses 16 Hurd's motions regarding his contemplated appeal. 17 As to the parties' contentions, the 18 plaintiff contends that he is entitled to access to 19 the interim report because it is necessary and 20 essential to achieving his proper purpose of 21 investigating corporate mismanagement, wrongdoing, and 22 waste by the HP board in connection with the board's 23 decision not to fire Hurd for cause and, therefore, 24 permit him to receive a lucrative severance package.

14 14 1 HP disagrees and contends that especially given the 2 extensive materials it has given to plaintiff already, 3 plaintiff has no need for the report because he has 4 sufficient materials to determine whether the HP board 5 committed wrongdoing with regard to its handling of 6 Hurd's departure, or at least to formulate whatever 7 his next actions, that is, Espinoza's next actions, 8 would be. 9 Furthermore, HP argues that it may not 10 be compelled to produce the report because it is 11 protected by the attorney-client privilege and 12 attorney work product doctrine and the plaintiff has 13 not demonstrated any basis to avoid either of those 14 doctrines. 15 Turning to the standard for Section and compliance with that standard, under 8 17 Delaware Code Section 220, stockholders of a Delaware 18 corporation have a statutory right to inspect the 19 books and records of a corporation so long as they 20 comply with the requirements of the statute. There is 21 no doubt here that plaintiff has complied with all the 22 formal requirements of Section 220. The right to 23 inspect books and records under Section 220 is a 24 powerful tool for stockholders to use, but it is not

15 15 1 limitless. Thus, upon making an application to this 2 Court to compel the corporation to produce the 3 stockholder's desired books and records, a plaintiff 4 must show that it has demonstrated a proper purpose 5 for seeking inspection. Section 220 defines a proper 6 purpose as a purpose reasonably related to such 7 person's interest as a stockholder. And a stockholder 8 has the burden to prove this by a preponderance of the 9 evidence. Delaware courts have recognized a number of 10 different proper purposes under Section 220, and that 11 one of the common proper purposes is the desire to 12 investigate potential corporate mismanagement, 13 wrongdoing, or waste, as is the stated purpose here. 14 It is not enough, however, merely to 15 state such a purpose. Rather, a stockholder must 16 satisfy the credible basis standard as announced by 17 our Supreme Court. That is, "It is" -- and this is a 18 quote -- "It is not required to prove by a 19 preponderance of the evidence that waste and 20 mismanagement are actually occurring. Stockholders 21 need only show by a preponderance of the evidence a 22 credible basis from which the Court of Chancery can 23 infer there is a possible mismanagement that would 24 warrant further investigation, a showing that

16 16 1 ultimately" -- "may ultimately fall well short of 2 demonstrating that anything wrong occurred. That 3 threshold may be satisfied by a credible showing 4 through documents logic, testimony or otherwise that 5 there are legitimate issues of wrongdoing." 6 Here, HP does not dispute that 7 plaintiff has stated a proper purpose for his Section request for the interim report. Therefore, I 9 assume for purposes of this oral ruling that plaintiff 10 has stated a proper purpose as to his demand for books 11 and records to investigate corporate mismanagement, 12 wrongdoing, and waste by the board in connection with 13 Hurd's resignation and his receipt of the severance 14 package. I focus instead, as both the parties have, 15 on whether the interim report is subject to the 16 attorney-client privilege or the work product doctrine 17 and whether obtaining it is necessary and essential to 18 achieving plaintiff's stated proper purpose under 19 Section Focusing first on privilege, HP makes 21 the preliminary point that it already has produced 22 substantial information to plaintiff in response to 23 the 220 demand. It contends that this fact is 24 relevant in considering whether plaintiff's needs to

17 17 1 inspect the report should override HP's assertion of 2 attorney-client privilege and its invocation of the 3 work product doctrine. To some extent, I consider 4 this fact relevant in my analysis as to whether HP's 5 claimed privileges should withstand the challenges 6 from plaintiff. 7 Turning first to the attorney-client 8 privilege, that privilege is codified in Section -- or 9 Rule 502(b) of the Delaware Rules of Evidence. And, 10 in particular, Rule 502(b) states in pertinent part 11 that -- and this is a quote -- "A client has a 12 privilege to refuse to disclose and to prevent any 13 other person from disclosing confidential 14 communications made for the purpose of facilitating 15 the rendition of professional legal services to the 16 client (1) between [himself] or [his] representative 17 and [his] lawyer or [his] lawyer's representative, (2) 18 between [his] lawyer and the lawyer's representative, 19 (3) by [him] or [his] representative or [his] lawyer 20 or a representative of the lawyer to a lawyer or a 21 representative of a lawyer representing another in a 22 matter of common interest,... or, skipping a bit, 23 No. 5, "among lawyers and their representatives 24 representing the same client."

18 18 1 I hope that I don't have to go back to 2 that quote again. 3 This privilege affords protection to 4 communications but not to the facts underlying those 5 communications. Moreover, it finds full application 6 where a corporation is the client seeking professional 7 advice and assistance. Legal advice and assistance. 8 In situations where it is invoked by a corporation in 9 response to litigation initiated by a stockholder, 10 however, the Delaware Supreme Court has found that an 11 inevitable conflict arises. The Court explained in 12 Zirn that the corporation may only assert the 13 privilege through its agents, i.e., its officers and 14 directors who must exercise the privilege in a manner 15 consistent with their fiduciary duty to act in the 16 best interests of the corporation and not of 17 themselves individually. The privilege, therefore, is 18 not absolute. And if legal advice relates to a matter 19 which becomes the subject of a suit by a shareholder 20 against the corporation, the invocation of the 21 privilege may be restricted or denied entirely. 22 Specifically, as this Court, the Court 23 of Chancery, stated in the Grimes case -- and I'm 24 quoting -- "Where the corporation is in a suit against

19 19 1 its stockholders on charges of acting inimically to 2 stockholders' interests, protection of those interests 3 as well as those of the corporation and of the public 4 require that the availability of the privilege be 5 subject to the right of the stockholders to show good 6 cause why the privilege should not apply." In this 7 regard, Delaware courts balance the nonexhaustive list 8 of factors articulated in the Garner versus 9 Wolfinbarger case to decide whether good cause exists. 10 And for that, I cite as an example the In Re Fuqua 11 Industries case from Chancery in May of In the books and records context, the 13 relevant factors include, one, the number of shares 14 owned by the shareholder and the percentage of stock 15 they represent; two, the assertion of a colorable 16 claim; three, the necessity of the information and its 17 availability from other sources; four, whether the 18 stockholder has identified the information sought or 19 is merely fishing for information; and five, whether 20 the communication is advice concerning the litigation 21 itself. 22 This Court generally has afforded the 23 most weight to Factors 2 through 4 in conducting this 24 type balancing analysis.

20 20 1 I begin from the premise that absent a 2 sufficient reason not to apply the attorney-client 3 privilege, that privilege would attach to the interim 4 report. It was a report created by outside counsel, 5 Covington & Burling, in the course of its 6 representation of HP at the behest of HP's board. 7 Covington created the report to communicate the status 8 of its investigation into the allegations in the 9 Allred letter and to provide interim legal advice to 10 the HP board regarding Fisher's allegations. 11 Moreover, it was presented to an executive session of 12 the nonemployee members of the board in a confidential 13 session and was not provided to anyone else besides 14 the board, counsel, counsel's consultants, or HP 15 personnel supporting the HP legal department. 16 Thus, in normal circumstances, the 17 interim report would be entitled to attorney-client 18 privilege protection. Thus, I turn to whether, 19 pursuant to the balancing test and the factors in 20 Garner, I should find that plaintiff is entitled to 21 the report, notwithstanding the attorney-client 22 privilege. 23 The first of these factors, stock 24 ownership, does not favor sidestepping the privilege.

21 21 1 Plaintiffs only own 250 shares of HP out of some 2 2 billion shares outstanding. 3 In addition, the fifth factor, whether 4 the document contains advice concerning the present 5 litigation itself, strikes me as weighing against 6 disclosure of the report. The reason is that while it 7 apparently does not directly address the reasons why 8 the board determined not to fire Hurd for cause, it, 9 nonetheless, may be relevant to the conduct plaintiff 10 seeks to investigate in its Section 220 action. 11 Both these factors, however, are of 12 only secondary importance in the circumstances of this 13 case. I give more emphasis to the three factors on 14 which our Court traditionally places more weight in 15 conducting a Garner analysis. The fourth of the five 16 factors I mentioned a moment ago; that is, whether a 17 plaintiff has identified the information he seeks, 18 favors disclosure in this case because it clearly is 19 not a fishing expedition. Plaintiff has identified a 20 single document that he seeks. The other two factors, 21 however, do not favor the plaintiff, in my view. 22 The second factor, whether the 23 plaintiff has asserted an obviously colorable claim is 24 essentially neutral. On the one hand, plaintiff has

22 22 1 shown that HP admitted specific instances of Hurd's 2 corporate wrongdoing and that the board considered his 3 transgressions sufficiently serious as to require his 4 departure. Nevertheless, the board approved Hurd's 5 lucrative severance package when it might not have 6 needed to pay him anything if the board had opted to 7 fire him for cause. 8 This showing might meet this Court's 9 relatively minimal colorable claim standard, which is 10 used, for example, in analyzing a motion to expedite 11 and might be comparable to the usual kind of credible basis sort of standard that we use. In this 13 case, Espinoza may have a colorable claim that the HP 14 board committed waste in approving the severance 15 package; but, on the other hand, it's less clear 16 whether plaintiff's assertion of potential waste is 17 "obviously" colorable, as some of the cases applying 18 Garner have required. 19 I reject the plaintiff's contention to 20 the extent it makes it that to state a proper purpose 21 under Section 220 related to corporate wrongdoing 22 automatically means that a plaintiff has stated an 23 obviously colorable claim for that wrongdoing. To 24 state a proper purpose, the plaintiff needed only to

23 23 1 show a credible basis for suspecting wrongdoing. I 2 think he has made that showing here and he has shown, 3 as I indicated, perhaps a colorable claim that maybe 4 wrongdoing occurred in connection with not firing 5 Mr. Hurd for cause. 6 But I think that Garner requires 7 something more to avoid the attorney-client privilege 8 in terms of the overall balancing. I don't think that 9 the finding here is such that it disqualifies 10 Mr. Espinoza from gaining access to the interim 11 report. The colorable factor does not favor 12 Hewlett-Packard to that degree, but I am aware that 13 waste is a difficult claim to prove. And whether the 14 plaintiff's showing is sufficient to demonstrate his 15 claim is obviously colorable for purposes of 16 supporting a conclusion under Garner that the 17 attorney-client privilege should not apply is not that 18 clear to me. However, I don't need to resolve that 19 issue here. Even assuming that the plaintiff has an 20 obviously colorable claim for waste -- and I'm simply 21 assuming that, not finding it -- this factor does not 22 outweigh the other factors in this analysis. 23 The plaintiff has not shown -- and 24 this is the most important fact. The plaintiff has

24 24 1 not shown that it needs the report and the information 2 in the report is not available from other sources. 3 The plaintiff's stated purpose is to investigate the 4 board's decision not to terminate Hurd for cause, 5 thereby paving the way for Hurd to receive his 6 severance package. First, the plaintiff does not 7 dispute that HP already produced a great deal of 8 information relating to the board's response to the 9 allegations in the Allred letter and their conclusion 10 that Hurd violated their standards of business conduct 11 and should be asked to leave. This information 12 includes the expense reports submitted by or on behalf 13 of Hurd, the corporate records relating to Fisher's 14 compensation, the HP guidelines, and so on, that I've 15 already mentioned in my recitation of the facts, as 16 well as the expense reports of the assistant to 17 Mr. Hurd and the Allred letter. 18 Plaintiff, thus, has the allegations 19 of wrongdoing. And some of the information comes in 20 the form of public statements made by the HP board. 21 He not only has the minutes of the HP board, but he 22 has the conference calls that HP had with its 23 investors, and so on, where statements were made by 24 HP, indicating that it believes wrongs, in the sense

25 25 1 of wrongs against HP's internal policies, have 2 occurred and they've occurred to such an extent that 3 Mr. Hurd should be asked to leave. These matters, as 4 well as the fact that the plaintiff has the underlying 5 documents and can make his own assessment as to how 6 serious the wrongdoing is based on his -- what he has 7 obtained in the 220 action, as well as the minutes of 8 the board and the fact that through those minutes he 9 discovered the existence of the interim report that 10 we're talking about today, all show that the plaintiff 11 has extensive information in this area. It has enough 12 information potentially to draw its own conclusions 13 about what the board should have done. And this 14 information presumably also is contained in the 15 report. But because it is in many of these other 16 underlying documents at this stage at least, plaintiff 17 has not demonstrated that it also needs the report, 18 the interim report, of Covington to complete the type 19 of investigation that is contemplated by Section Most importantly, however, plaintiff's 21 stated purpose belies its claim for necessity here. 22 The plaintiff's claim is that he seeks the interim 23 report for the purpose of furthering his investigation 24 into why the board determined not to fire Hurd for

26 26 1 cause. But HP explicitly has represented to the Court 2 at the hearing and in its papers that -- and here I'm 3 quoting -- "Contrary to plaintiff's assertions of 4 need, the interim report does not address the Board's 5 decision-making process and does not discuss the 6 for-cause issue at all." 7 There is no evidence before me that 8 would support an inference or that would cause me to 9 conclude at this point, anyway, that I should not 10 believe that statement. And we are only in a action. It may be down the road there may be other 12 litigation. Perhaps it will involve the plaintiff, 13 maybe not; but at some point in time the company may 14 decide to rely on the interim report as part of its 15 defense. If that ever occurs, then that would 16 constitute a waiver of any claim of privilege or work 17 product and the information would be produced. 18 Another possibility is that it may 19 turn up through further investigation by depositions 20 and other means that there is truly no other way to 21 get the information that the plaintiff contends it 22 needs now. But at this stage, that has not been 23 shown. 24 The plaintiff relies on Grimes versus

27 27 1 DSC Communications for the proposition that the report 2 is necessary to its investigative purpose because it 3 provides the only window into what the board was 4 considering when it made its decision about Hurd. 5 In Grimes, a stockholder brought a 6 Section 220 action after it was notified that a 7 special committee of the defendant corporation's board 8 recommended refusing the plaintiff's presuit demand. 9 The plaintiff sought, among other things, the report 10 of the special committee which contained its 11 recommendation that the board eventually adopted. The 12 plaintiff's stated purpose was to determine whether 13 the special committee and the board complied with 14 Delaware law in rejecting the plaintiff's demand. In 15 the face of defendant's argument that it had already 16 produced sufficient information pertaining to the 17 underlying alleged wrongdoing, Vice Chancellor Lamb 18 explained that plaintiff's purpose supporting its demand is his right to inquire into the independence, 20 good faith, and due care of the special committee. 21 The underlying merits of the issues addressed by the 22 special committee are of secondary and indirect 23 relevance. 24 As the Vice Chancellor explained in

28 28 1 that case, the plaintiff was, therefore, entitled to 2 receive copies of the special committee's report, 3 minutes of the meetings of the special committee, and 4 minutes of any meeting of the board of directors 5 relating to the creation or functioning of the special 6 committee, including any meeting of the board of 7 directors at which the recommendation of the special 8 committee was considered or approved. Vice Chancellor 9 Lamb said that ordinarily these basic documents should 10 suffice for the purposes of establishing or raising 11 reasonable grounds for suspicions about a special 12 committee's independence, good faith, and due care. 13 Thus, I conclude that the plaintiff is 14 not entitled to receive or examine copies of other 15 documents not directly related to the special 16 committee's conclusions and recommendations unless he 17 can articulate a reasonable need to inquire further 18 after review of those basic documents. For example and here I'm referring to Vice Chancellor Lamb's 20 holding in the Grimes case. He decided that he would 21 require a further showing of need before requiring DSC 22 to produce to Grimes the interview summaries that had 23 been prepared by counsel. 24 Despite the claims that it was subject

29 29 1 to the attorney-client privilege because it was 2 prepared with the help of counsel, the Court ordered 3 the special committee's report in Grimes produced and 4 further explained that of particular import is the 5 fact that the documents sought are unavailable from 6 any other source, while at the same time their 7 production is integral to the plaintiff's ability to 8 assess whether the board wrongfully refused his 9 demand, which was the stated purpose of his Section case. 11 That was in Grimes, a peremptory 12 denial of a presuit demand. Virtually no explanation 13 was given. Virtually no explanation had shown up up 14 to that point. And, there, the Court was handing over 15 the special committee's report, indicating what their 16 recommendation was in terms of denying the demand. 17 It's much more -- in my view, it's much more closely 18 related to the actual deliberations of the board than 19 what we have in this case. I note that the special 20 committee report in Grimes apparently was prepared by 21 attorneys, but it's one thing for an attorney to 22 prepare a draft of a committee report. It's another 23 thing, I think, for an attorney to prepare the 24 attorney's own report to the committee. And in our

30 30 1 case, it goes further than that. 2 The interim report was disclosed to 3 the executive session of the HP board on or about 4 July 28th at the very beginning of the board's 5 deliberations as to what they were going to do with 6 respect to any discipline as to Mr. Hurd. Evidently 7 that report may have been discussed again at later 8 meetings. There were a number of other meetings of 9 the HP board in the time period from July 28th up 10 through August 6th or so, but there was no further 11 report from Covington. And it's not clear that 12 Covington was even involved in the later meetings. 13 Those facts, together with the 14 representation of HP that there is nothing in the 15 interim report that deals with the question of whether 16 Hurd would be subject to dismissal for just cause, 17 distinguishes our case from Grimes as far as I'm 18 concerned. 19 I'll just take a second here and look 20 over my notes. 21 The report in Grimes did concern the 22 process that the board took with respect to the 23 decision of rejecting the demand. So it clearly was 24 relevant. And Vice Chancellor Lamb concluded it was

31 31 1 unavailable from any other source. 2 Here, in contrast, the interim report 3 contains Covington's summary of facts and conclusions 4 as to Fisher's allegations of Hurd's wrongdoing. As 5 represented to the Court, it does not contain the 6 thought process of the board or any committee of the 7 board in determining not to fire Hurd for cause. It 8 might be helpful to the plaintiff in that it is 9 something the board considered in making its decision, 10 but this fact does not alter my conclusion that the 11 report is not necessary to the plaintiff's 12 investigation into the board's thought process in 13 deciding not to fire Hurd for cause. That is, it 14 hasn't made a sufficient showing at this stage under 15 Garner to avoid the attorney-client privilege claim. 16 I also note that much of the 17 information that the board considered, including what 18 is evidently summarized in the report, has been 19 produced by HP in the way of minutes, expense reports, 20 and other reports of that nature. 21 So balancing the Garner factors and 22 the circumstances of this case, I find that plaintiff 23 has failed to demonstrate that the attorney-client 24 privilege does not apply to the interim report.

32 32 1 As far as attorney work product is 2 concerned, for many of the same reasons, I find that 3 the Covington report also is protected from disclosure 4 by the attorney work product doctrine. The doctrine 5 assures an attorney that private work product done in 6 anticipation of litigation generally will remain free 7 from the encroachments of opposing counsel and has 8 been codified in Court of Chancery Rule 26(b)(3), 9 which is well-known to all of us. The doctrine of 10 work product, however, does not provide an 11 impenetrable barrier. Rather, it's a qualified 12 immunity. In the context of a 220 action, therefore, 13 a party may still inspect nonopinion work product if 14 the party seeking discovery or seeking production 15 under 220 shows it has a substantial need for the 16 materials and that it cannot acquire a substantial 17 equivalent without undue hardship. 18 Alternatively, access to opinion work 19 product, for example, or -- by "opinion work product," 20 I'm talking about the mental impressions, conclusions, 21 opinions, and legal theories of a party's attorneys that may be obtained only if the requesting party 23 shows it is directed to a pivotal issue in the current 24 litigation and the need for the information is

33 33 1 compelling. 2 The first issue I turn to regarding 3 work product is whether the report qualifies for the 4 work product protection in the first place. The 5 plaintiff argues that it does not qualify for such 6 protection because the report was created in 7 anticipation of different litigation than this 8 litigation and would only be protected by the work 9 product doctrine if that litigation is closely related 10 in parties and subject matter to the litigation here. 11 For that proposition, the plaintiff 12 relies on the Ramada case from our Delaware Superior 13 Court. HP contends that the report clearly qualifies 14 for protection here because it contains information 15 and counsel's conclusions regarding the status of 16 Covington's internal investigation of the allegations 17 in the Allred letter. More importantly, according to 18 HP, the report was created based on HP's anticipation 19 of litigation that would arise with regard to Fisher, 20 HP, potentially the HP board, and the HP stockholders. 21 So, in addition, HP argues that more recent Delaware 22 precedent does not require as close a connection 23 between two matters as plaintiff contends the Ramada 24 case calls for as to the issue of whether a document

34 34 1 prepared in anticipation of one matter may be 2 protected as work product in the context of another 3 matter. 4 It is well-settled that to qualify for 5 work product immunity, materials must be written in 6 preparation for or with an eye to anticipated 7 litigation. Disputes often arise, however, concerning 8 when materials may be deemed to have been so prepared. 9 In Delaware, a generalized alertness to the 10 possibility of litigation is insufficient to bring 11 material within the ambit of the doctrine. But 12 materials prepared when litigation may merely be a 13 contingency still may qualify for protection if the 14 prospect of litigation is identifiable because of 15 specific claims that already have arisen. 16 Furthermore, the protection the 17 doctrine affords is not limited to materials prepared 18 in anticipation of the specific litigation in which 19 production of those materials is sought. Some 20 Delaware cases, including the Ramada case, hold that 21 the doctrine protects attorney work product where the 22 matter for which it was prepared and the pending 23 matter are closely related as far as parties and 24 subject matter. In this regard, whether there is such

35 35 1 a close relationship between the matters is a question 2 of fact to be decided by the Court. As mentioned, 3 other Delaware cases have discussed work product 4 protection in broader terms in the context of a 5 document prepared in connection with one matter being 6 used as far as another matter. 7 For example, in National Union Fire 8 Insurance of Pittsburgh, the Court held that to fall 9 within the purview of the work product immunity, the 10 material need only be prepared in anticipation of any 11 litigation or trial. I generally subscribe more 12 closely to the latter view. Rather than requiring a 13 close relationship, I believe attorney work product 14 protection may apply to a document that was prepared 15 in anticipation of any litigation, so long as the 16 claims or matter for which the document was prepared 17 is reasonably related to the matter in which the work 18 product protection claim is being made. 19 Here, that standard is easily met. 20 But even applying the close relationship standard 21 advanced by plaintiff, I still would reach the same 22 conclusion that the report is attorney work product 23 subject to protection from disclosure. Here, there is 24 a close relationship between the parties to the

36 36 1 dispute; that is, between Fisher and Hurd and HP in 2 the one matter and between plaintiff and the HP and 3 its board or its former board in this -- plaintiff and 4 HP in this 220 action and, to the extent any other 5 action, class action or derivative, results, it might 6 be plaintiff, HP, and the board. 7 Fisher accused Hurd and HP of 8 misconduct relating to her allegations of sexual 9 harassment and corporate misconduct. Plaintiff seeks 10 information about whether the HP board committed 11 wrongdoing based on the way they reacted to those same 12 allegations and the actions it took with regard to 13 Hurd, the subject of those allegations. Here, there 14 is such a close relationship between the two sets of 15 potential claims as to warrant attorney work product 16 protection for the report. 17 But even if the report is subject to 18 work product protection, plaintiff still argues that 19 it has demonstrated a substantial and compelling need 20 to obtain it. For similar reasons as to why I 21 explained I believe that plaintiff has not satisfied 22 the Garner test in the attorney-client privilege 23 context, HP contends plaintiff can't establish or meet 24 the less onerous burden of showing a substantial need

37 37 1 to obtain the report as to nonopinion work product. 2 HP contends the report contains both 3 Covington's summary of the facts as they found them in 4 their investigation, as well as their mental 5 impressions and legal advice pertaining to how HP 6 might address those facts. While the latter would be 7 subject to the higher compelling-need standard to 8 overcome the work product doctrine, I need not address 9 it because I find that the plaintiff cannot meet the 10 lower substantial-need/undue-burden test for fact work 11 product. 12 As in the attorney-client context, 13 plaintiff argues that its compelling need arises out 14 of its need to identify why the board didn't decide to 15 terminate Hurd for cause but, as previously discussed, 16 the report was given to the board before the board 17 made its final decision as to how to handle Hurd's 18 employment status at HP. The report, while something 19 upon which the board relied -- "relied" may be too 20 strong a term, but it was certainly something that the 21 board had before it and presumably considered in 22 making its decision -- it still does not contain a 23 summary or explanation of why the board decided not to 24 fire Hurd for cause. It's not in that sense like a

38 38 1 report of a special committee, explaining the grounds 2 for a recommendation of a board committee not to take 3 a particular action or how to take a particular 4 action. 5 I think the distinction is important. 6 As to the factual information in the report, i.e., 7 Covington's factual conclusions about Hurd's 8 wrongdoing, this information is obtainable from other 9 sources, including the information that HP already 10 produced to the plaintiff. 11 As to Covington's legal conclusions, 12 HP has not put these in dispute by reliance on an 13 advice-of-counsel defense and they might do that in 14 the future, but that's for another day. It's not 15 before me at this time. 16 Thus, for the same reasons the report 17 is not necessary and does not contain information 18 unavailable from other sources as discussed in the 19 context of the Garner factors, I find that plaintiff 20 has not shown a basis for overcoming the attorney work 21 product claim as to the interim report. 22 There was an allegation by the 23 plaintiff that HP has waived any claims of 24 attorney-client privilege or work product. In

39 39 1 general, to waive a privilege, an individual must know 2 of a particular right and voluntarily and 3 intentionally choose to relinquish it. A waiver does 4 not always have to be expressed, but it may also be 5 implied from the circumstances. 6 In particular, a waiver of the 7 attorney-client privilege will be found where a 8 person, upon whom these rules confer a privilege 9 against disclosure or his predecessor, while a holder 10 of the privilege, voluntarily discloses or consents to 11 disclosure of any significant part of the privileged 12 matter. In addition, disclosure of work product does 13 not negate its protection unless the disclosure is 14 inconsistent with the maintenance of the secrecy from 15 the disclosing party's adversary. A party may 16 relinquish its right to protection of its work product 17 if it knowingly and voluntarily discloses it with 18 either the intention or the practical result that the 19 opposing party may see the documents. 20 But this finding of waiver really 21 requires evidence indicating action on the part of 22 Hewlett-Packard. It's the party that owns the 23 privilege and the work product immunity, it and its 24 attorneys as far as the immunity is concerned.

40 40 1 And as I discussed at the hearing, 2 plaintiff has offered no evidence that would support a 3 finding that HP or its attorneys consciously or 4 voluntarily waived either the attorney-client 5 privilege or work product doctrine. The fact that the 6 information about the report found its way into the 7 media, some aspects of the report found its way into 8 the media, reportedly -- I don't know for sure -- that 9 does not satisfy the showing the plaintiff would need 10 to make in order to establish a deliberate waiver by 11 HP. The disclosures may have come from individuals 12 acting on their own and without the authorization of 13 HP. Therefore, I reject the plaintiff's waiver 14 argument. 15 And then lastly, in terms of the 16 scope, once a plaintiff has established its right to 17 inspect a corporation's books and records, it's the 18 responsibility of the trial court to tailor the 19 inspection to the stockholder's stated purpose. In 20 that regard, the plaintiff must prove that each record 21 it seeks is necessary and essential to the stated 22 purpose of his inspection. This requirement 23 demonstrates Section 220's insistence that the 24 plaintiff make its demand for inspection in good

41 41 1 faith, which is the subject of this Court's duty to 2 examine closely any 220 demand to prevent possible 3 abuse of the shareholder's right of inspection. 4 In essence, the core inquiry is 5 whether the requested documents are reasonably 6 required to satisfy the purpose of the demand. 7 Because I find that the interim report is protected by 8 the attorney-client privilege and work product 9 doctrine, it's not necessary for me to reach the issue 10 of whether it also would be necessary and essential to 11 the plaintiff's stated purpose. I note briefly, 12 however, it's always important to keep in mind that 13 usefulness may not be conflated with the proper 14 purpose standard or the necessity requirement under 15 Section 220. That a document would be potentially 16 discoverable under Rule 34 also does not make it 17 necessary and essential under Section Here, the plaintiff sought to obtain 19 documents to determine whether the board committed 20 wrongdoing in deciding not to terminate Hurd for 21 cause. The report does not appear, from the record, 22 to pertain directly to this particular decision but, 23 rather, was one component of what the board considered 24 in making its decision. But other information is

42 42 1 available that indicates much of what that one 2 component was. And on the showings that have been 3 made to me, I would be leaning in favor, if I had to 4 reach the issue, of certainly questioning whether this 5 interim report is necessary and essential for 6 plaintiff's purposes. 7 Lastly, I would note that this ruling 8 should not be read as discouraging plaintiff's use of 9 Section 220 as a tool at hand to investigate potential 10 corporate wrongdoing. In this case the plaintiff 11 successfully used this tool to obtain from 12 Hewlett-Packard various documents related to Hurd's 13 departure that were not previously publicly available. 14 Those include, for example, the minutes, the expense 15 reports, and all the other items that I have referred 16 to that give a much better indication as to what 17 degree, if at all, the board considered the just cause 18 possibility as one of the actions or options that it 19 could have pursued. 20 Indeed, I understand that the 21 existence of the interim report was discovered only as 22 a result of the documents plaintiff obtained in this 23 Section 220 action. That a stockholder seeks books 24 and records in a 220 action, however, does not obviate