PRIVILEGE PITFALLS FOR COMPANIES WITH DIRECTORS DESIGNATED BY INVESTMENT FIRMS
In the start-up world, private equity and venture funds often gain the right to designate one or more directors of the portfolio company in which they invest. The new director often is a high-level employee or manager of the investment fund, frequently a managing director.
The new director thus is a dual fiduciary, owing duties of care and loyalty both to the investment fund and to the portfolio company. In both roles, the director may need to consult with experts, sometimes including lawyers. The information needed by the expert may be confidential – indeed, it may be material non-public information, the receipt of which could make trading in the portfolio company’s stock improper under US securities laws such as Securities and Exchange Commission Rule 10b-5.
But the information also may be privileged under the attorney-client privilege or the work product doctrine, or both. Sharing such information with others outside the portfolio company may create the risk that the privilege will be lost, and the information become discoverable by adversaries. And even without sharing, use of the information by the director creates what one leading jurist – J. Travis Laster, vice chancellor of the Delaware Court of Chancery – has called the “one brain” problem: a director cannot segment his or her brain, any more than the rest of us can, so information gleaned in one capacity will likely affect decision making in the director’s other capacity.
Oct-Dec 2023 issue
Pillsbury Winthrop Shaw Pittman LLP