Indiana Supreme Court Sheds Light on the Scope of Disclosure of Special Litigation Committee’s Reports
To disclose, or not to disclose?—that was the question for the Indiana Supreme Court in a recent decision of first impression, TP Orthodontics, Inc. v. Kesling
In this case, the court addressed a discovery dispute involving a special litigation committee’s report in a derivative action filed pursuant to Indiana Code § 23-1-32-4
In general, the statute authorizes a corporate board of directors to select three disinterested persons to serve on a special litigation committee in charge of investigating the merits of a derivative action brought against the corporation. Following its investigation, the committee determines whether pursuing the derivative suit is in the best interests of the corporation. If the committee determines it is not, the merits of that determination are presumptively conclusive against any shareholder bringing the derivative proceeding. The shareholder may only overcome this presumption by showing that either (1) the committee was not “disinterested;” or (2) the committee’s investigation was not conducted in good faith. TP Orthodontics
involved the latter exception.
In TP Orthodontics
, a special litigation committee decided against pursuing the shareholders’ proposed derivative claims against the president of a closely-held corporation. Following extensive investigative efforts, numerous meetings and witness interviews, the committee prepared a lengthy report of its findings. Based on the report’s recommendations, the corporation filed a motion to dismiss the complaint and attached a heavily redacted version of the report in support of its motion. The disclosed report provided only a summary of the procedures the committee used to arrive at its decision.
Challenging the good faith of the committee’s investigation, the shareholders moved to compel production of the report in its entirety. The corporation argued that the redacted portions were either irrelevant or privileged. The trial court granted the shareholders’ motion and the Indiana Court of Appeals affirmed on interlocutory appeal.
The Indiana Supreme Court disagreed with both of the lower courts. In its analysis, the Court addressed both: (1) the relevance of the redacted portions of the report; and (2) the scope of the attorney-client and work-product privileges.
(1) The Court Held that the Entire Report is Relevant to the Good-Faith Inquiry into the Special Committee’s Investigation
First, the Court evaluated the report’s relevance to the determination of whether the special committee conducted a good faith investigation into the derivative claims. After carefully weighing the competing interests of the shareholders’ right to be informed and the corporation’s decision-making autonomy, the Court ordered the corporation to disclose more than a mere summary of its investigative methods. The court reasoned that “the good faith inquiry goes beyond procedure and into substance
of [the committee’s] investigation.”
As a result, in addition to the disclosed summary of procedures, the corporation had to reveal the redacted portions of the report that demonstrated the quality
of such procedures.
(2) The Court Held that the Attorney-Client and Work Product Privileges Apply to Special Litigation Committees’ Reports
Second, the Court held that even if the contents of the report are relevant to the shareholders’ good-faith inquiry, compelling production of the entire report constituted abuse of discretion because the report contained privileged attorney-client communications and attorney work product. The Court expressly rejected the shareholders’ argument that the corporation implicitly waived its attorney-client privilege because it put the committee’s good faith “in issue.”
As a result, the Court remanded the issue to the trial court to conduct an in-camera review and ordered the corporation to specifically identify the privileged portions of the report.
This case marks an important addition to Indiana’s body of corporate law. Even though this decision suggests that the contents of special litigation reports may now be fair game for at least limited discovery in derivative lawsuits, the scope of protection afforded by the attorney-client and work product privileges remains to be fully determined. Committees and counsel involved in the preparation of such reports should therefore proceed with an awareness of the risks of future disclosure.
For additional information contact Philip Whistler
, Olga Voinarevich
or any member of Ice Miller's Litigation and Intellectual Property Group
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.
15 N.E.3d 985 (Ind. 2014).
at 993 (emphasis added).