COURT OF CHANCERY
OF THE
STATE OF DELAWARE
LORI W. WILL LEONARD L. WILLIAMS JUSTICE CENTER
VICE CHANCELLOR 500 N. KING STREET, SUITE 11400
WILMINGTON, DELAWARE 19801-3734
Date Submitted: September 21, 2021
Date Decided: September 22, 2021
A. Thompson Bayliss, Esquire Arthur G. Connolly, III, Esquire
Adam K. Schluman, Esquire Matthew F. Boyer, Esquire
Abrams & Bayliss LLP Connolly Gallagher LLP
20 Montchanin Road, Suite 200 1201 North Market Street, 20th Floor
Wilmington, Delaware 19807 Wilmington, Delaware 19801
Jon E. Abramczyk, Esquire
Alexandra M. Cumings, Esquire
Morris Nichols Arsht & Tunnell LLP
Wilmington, Delaware 19801
RE: In re: Howard Midstream Energy Partners, LLC
C.A. No. 2021-0487-LWW
Dear Counsel:
This decision resolves Petitioners’ Motion to Compel. The motion seeks to
compel nominal defendant Howard Midstream Energy Partners, LLC (the
“Company”) to produce certain privileged documents that were prepared at a time
when two of the petitioners were directors of the company. The crux of the dispute
is whether the petitioners were adverse to the Company and to the respondent
directors. The Company, along with the individual respondents, asserts that the
petitioners were adverse on all matters concerning the petitioners’ separation from
the Company. The petitioners, however, argue that their adversity should be
C.A. No. 2021-0487-LWW
September 22, 2021
Page 2 of 14
viewed as limited to separation negotiations. After reviewing the parties’
submissions and oral argument on the motion, I conclude that the petitioners’
construction of the directors’ adversity is too narrow. For the reasons explained
below, the Motion to Compel is denied.
I. BACKGROUND
Howard Midstream Energy Partners, LLC is managed by a six-member
Board of Directors pursuant to the Company’s LLC Agreement.1 At the time the
members entered into the LLC Agreement, the Company had two management
members: respondent J. Michael Howard and petitioner Brad Bynum, the
Company’s co-founders. The LLC Agreement provided that affiliates of one
outside investor (“AIMCo”) had the right to designate one director, affiliates of
another outside investor (“Alinda”) had the right to designate two directors, and an
entity jointly controlled by Howard and Bynum (“HBMI”) had the right to
designate three directors. 2 The three designees of HBMI were Howard, Bynum,
and petitioner Scott Archer, who served as the Company’s CFO.
1
Verified Pet. for Dissolution Under 6 Del. C. § 18-802 and for Relief Under 6 Del. C. §
18-110 (hereinafter “Pet.”) ¶ 6. (Dkt. 1).
2
Pet. Ex. A (LLC Agreement) § 6.2; Pet. ¶ 5.
C.A. No. 2021-0487-LWW
September 22, 2021
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In April 2021, Bynum and Howard began to disagree about how to run the
Company. Howard asked that Bynum resign and Bynum initially refused.3 On
April 14, 2021, the Board of Directors formed a Special Committee to “consider,
review and evaluate” certain “executive employment and other personnel-related
matters relating to [Howard] and [Bynum].”4 The Special Committee concluded
that one of the co-founders should leave the Company and—according to the
petitioners—“took sides” to permit a “coup” by Howard.5 By April 22, 2021, the
petitioners had retained their own litigation counsel.6
On April 25, 2021, Howard and the Special Committee requested Bynum’s
resignation as an officer which, under the LLC Agreement, would trigger his
automatic removal as a director (the “April 25 Resignation Request”).7 They
likewise requested that Archer resign as CFO and a director and that the
Company’s General Counsel, petitioner Brett Braden, also resign.8 Bynum,
3
Pet. ¶¶ 9-10.
4
Pet’rs’ Mot. to Compel Ex. 6.
5
Pet. ¶¶ 14-15.
6
See Company Opp’n to Mot. to Compel Ex. F (petitioners’ privilege log withholding
documents on grounds of work product protection between the petitioners and counsel at
Quinn Emanuel Urquhart & Sullivan, LLP).
7
Pet. ¶ 16.
8
Id.
C.A. No. 2021-0487-LWW
September 22, 2021
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Archer, and Braden were unhappy but “expressed interest in negotiated departures
that would allow both sides to move on.”9
From there, the parties entered into separation negotiations that did not
proceed smoothly. The Company’s in-house counsel—other than Braden—
provided advice to the Special Committee, who negotiated opposite to the
petitioners.10 “Howard and the Special Committee made an initial low-ball offer”
to the petitioners and then, on May 6, 2021, made their “best and final” offers.11
The petitioners were purportedly told that if they did not accept those offers, they
would be terminated. 12
On May 25, 2021, Bynum and Archer called a special meeting of the Board
to be held on May 27, 2021 (the “May 27 Meeting”).13 The petitioners intended to
ask the Board to “reject the Special Committee’s recommendation and direct [the]
[p]etitioners to return to work.”14 According to the petitioners, on May 26, 2021,
Howard secretly entered into an agreement with affiliates of AIMCo and Alinda
(which designated the three other respondent members of the Board) to terminate
9
Pet. ¶ 17.
10
Pet’rs’ Mot. to Compel ¶ 12.
11
Pet. ¶¶ 19-20.
12
Pet. ¶ 20.
13
Pet. ¶ 22.
14
Id.
C.A. No. 2021-0487-LWW
September 22, 2021
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the petitioners while protecting certain financial and governance rights benefitting
Howard.15 The petitioners allege that they were “ambush[ed]” by that secret
alliance at the May 27 Meeting.16 During the meeting, Howard asserted that a
“Howard Trigger Date” had occurred under the LLC Agreement. 17 From there,
respondent James Metcalfe—a member of the Special Committee—declared
himself the chairman of the Board and introduced a series of motions and votes
that purported to remove Bynum, Archer, and Braden from their roles. 18
This action followed. The petitioners filed a petition in this court on June 3,
2021, seeking the dissolution of the Company and a declaration under 6 Del. C. §
18-110 that the purported terminations of Bynum, Archer, and Braden were
improper because, among other things, a Howard Trigger Date could not have
occurred. On June 17, 2021, I entered a Status Quo Order that maintained the
composition of the Board as it existed before the disputed May 27 Meeting during
the pendency of this action.19
15
Pet’rs’ Mot. to Compel ¶¶ 15-16.
16
Pet. ¶ 23.
17
Pet. ¶ 23. The occurrence of the Howard Trigger Date, as defined in the LLC
Agreement, is what purportedly allowed the governance changes voted on at the May 27
Meeting to transpire. Pet. ¶¶ 26-27.
18
Pet. ¶ 24.
19
Dkt. 37.
C.A. No. 2021-0487-LWW
September 22, 2021
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Now, the petitioners have moved to compel the production of certain
documents withheld by outside counsel for the Company as protected by the
attorney-client privilege and, for certain documents, a common interest privilege
between the Special Committee and the Company (including Howard).20 The
documents at issue were created between the April 25 Resignation Request and the
May 27 Meeting. The petitioners assert that Bynum and Archer are entitled to the
documents because they were directors of the Company during that time. In
response, the Company and the respondents assert that the petitioners cannot
access the privileged information because they were openly adverse to the
Company after the April 25 Resignation Request. The parties agree that adversity
was present after April 25, 2021 as far as separation negotiations are concerned.
The question is how broadly that adversity should be construed.
II. ANALYSIS
The petitioners rely on the general rule that a director’s right to access
company information is “essentially unfettered in nature.”21 That rule is rooted in
20
Pet’rs’ Mot. to Compel. At the petitioners’ urging, the Company retained neutral
counsel given its status as the nominal defendant in this action.
21
Kalisman v. Friedman, 2013 WL 1668205, at *3 (Del. Ch. Apr. 17, 2013) (quoting
Schoon v. Troy Corp., 2006 WL 1851481, at *1 n.8 (Del. Ch. June 27, 2006)).
C.A. No. 2021-0487-LWW
September 22, 2021
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the principle that board members “are responsible for the proper management of
the corporation.”22 The rule applies equally to LLCs and their managers.23
The Court of Chancery in Kalisman described the three recognized
limitations to that general rule. First, a “director’s right can be diminished ‘by an
ex ante agreement among the contracting parties.’”24 Second, the board can form a
special committee excluding a director, and that committee “would [be] free to
retain separate legal counsel, and its communications with that counsel would [be]
properly protected.”25 Third, privileged information can be withheld from a
director “once sufficient adversity exists between the director and the corporation
such that the director could no longer have a reasonable expectation that he was a
client of the board’s counsel.”26
22
Id. at *4 (quoting Donald J. Wolfe, Jr. & Michael A. Pittenger, Corporate and
Commercial Practice in the Delaware Court of Chancery § 7.02[d] (2012)).
23
See Lynch v. Gonzalez, 2019 WL 6125223, at *10-11 (Del. Ch. Nov. 18, 2019); see
also Obeid v. Gemini Real Estate Edvs., LLC, 2018 WL 2714784, at *4 (Del. Ch. June 5,
2018) (explaining that a member of an LLC has access to information in the same manner
as a corporate director, “[a]bsent validly imposed contractual limitations”).
24
Kalisman, 2013 WL 1668205, at *4 (quoting Moore Bus. Forms, Inc. v. Cordant
Hldgs. Corp., 1996 WL 3074444, at *5 (Del. Ch. June 4, 1996)).
25
Id. at *5 (quoting Moore, 1996, WL 307444, at *6).
26
Id.
C.A. No. 2021-0487-LWW
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For purposes of the third limitation, adversity is assessed in view of the
reasonableness of a director’s own expectations.27 As a result, such adversity
cannot be unilateral and without the director’s knowledge.28 “[C]oncealing the
existence of adversity may create a reasonable (although mistaken) expectation on
the part of a director that he was being treated identically with the other
directors . . . .”29
Here, there was no ex ante agreement limiting the directors’ access to
information. The special committee limitation is relevant, given the formation of
the Special Committee in April 2021. The primary issue, however, is based on the
third limitation: whether known adversity existed on matters beyond negotiations
about the petitioners’ separation terms after the April 25 Resignation Request.
The petitioners “agree that ‘open adversity’ existed between them and the
Company in connection with separation negotiations” after April 25, 2021.30 But
they contend that machinations behind the scenes by the Special Committee
members, Howard, and counsel to effectuate that separation—such as on the
declaration of a Howard Trigger Date and a “secret agreement” to implement
27
Id.
28
See In re CBS Corp. Litig., 2018 WL 3414163, at *5 (Del. Ch. July 13, 2018); see also
Lynch, 2019 WL 6125223, at *10-11 & n.123.
29
CBS, 2019 WL 6125223, at *5.
30
Pet’rs’ Mot. to Compel ¶ 39.
C.A. No. 2021-0487-LWW
September 22, 2021
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governance changes at the May 27 Meeting— are different. Because those plans
were concealed from the petitioners until the May 27 Meeting, the petitioners
assert that Bynum and Archer could not have reasonably expected that they were
no longer clients of Company counsel and are entitled to related communications.
After considering the parties’ submissions and the numerous exhibits
included with them, I disagree. The petitioners are correct that their adversity on
separation negotiations did not create adversity on all matters. But that adversity
cannot fairly be viewed as narrowly as the petitioners suggest given the facts of
this case.
Even before the Special Committee requested that the petitioners resign, the
petitioners were conferring with litigation counsel about “separation negotiations”
and the “special committee process.”31 By April 26, 2021, they were conferring
with one another “in anticipation of potential litigation regarding employment
termination” and were analyzing the LLC Agreement.32 By April 27, 2021,
Delaware litigation counsel was involved in those discussions.33 The petitioners
withheld certain communications during this time period as protected by the work
31
Company Opp’n to Mot. to Compel Ex. F (rows 1-5).
32
Id. (rows 6-36).
33
Id. (row 38).
C.A. No. 2021-0487-LWW
September 22, 2021
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product doctrine, meaning that they were prepared in anticipation of litigation.34
Plainly, the petitioners were considering pursuing complex litigation against the
respondents, who are the other members of the Board.
After April 25, 2021, obvious adversity existed between the petitioners
(including the Company’s General Counsel) on one hand, and Howard, the Special
Committee, and other Company counsel on the other hand. The Special
Committee had asked that the petitioners resign, and the petitioners agreed, subject
to negotiating the terms of their departures. Their adversity does not end with the
separation negotiations themselves. The mechanism by which the Board attempted
to remove the petitioners at the May 27 Meeting—a meeting the petitioners
called—was, until that point, a secret. But the parties’ escalating hostility on
removal was evident. That is, for purposes of this motion, the petitioners’
knowledge of the complex manner of removal is less important than their
knowledge that involuntary separation was a possibility. The petitioners therefore
had no reasonable expectation that they were a client of the Company’s counsel
34
See Zirn v. VLI Corp., 621 A.2d 773, 782 (Del. 1993); Saito v. McKesson HBOC, Inc.,
2002 WL 31657622, at *3 (Del. Ch. Nov. 13, 2002) (discussing that the work product
doctrine is intended to prevent discovery of materials “from an opposing party in
litigation” (citation omitted)).
C.A. No. 2021-0487-LWW
September 22, 2021
Page 11 of 14
with respect to how they were removed while Howard remained—the very matters
raised in this case.35
After the Special Committee recommended separation and the petitioners
expressed their willingness to leave, the Special Committee members—working
with the Company and its counsel—were entitled to continue to engage in
privileged communications that excluded the petitioners. On this point, the court’s
decision in SBC Interactive is instructive. 36 There, a general partner seeking to
withdraw from the partnership was found to lack a reasonable expectation that it
was a client of the partnership’s in-house counsel. Then-Vice Chancellor Jacobs
explained that the partnership was “entitled to deliberate and receive legal advice
in confidence and without having to share that advice with the director[s] whose
interests are adverse.”37
The second limitation described in Kalisman—the protection of a special
committee’s privileged communications from an excluded director—further
supports this conclusion. The petitioners acknowledge that the Special Committee
was permitted to exclude them from privileged communications. But they argue
that the Special Committee’s privilege was waived when it involved Howard and
35
See Kalisman, 2013 WL 1668205, at *5.
36
SBC Interactive, Inc. v. Corporate Media Partners, 1997 WL 770715 (Del. Ch. Dec. 9,
1997).
C.A. No. 2021-0487-LWW
September 22, 2021
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other Company employees in those exchanges.38 The respondents and the
Company contend that the Special Committee had a common interest with the
Company in implementing the Special Committee’s recommendation.
It seems logical to expect that the Special Committee, charged with
evaluating whether one of the co-founders should leave the Company, would
confer with the Company’s in-house counsel. In CBS, this court concluded that a
special committee could withhold communications with company in-house and
outside counsel from the non-committee member directors with adverse interests.39
That was so, the court explained, insofar as the matters on which counsel provided
assistance fell within the purview of the special committee. Here, the Special
Committee’s engagement with the Company’s in-house counsel (other than
Braden, who was conferring with Bynum and Archer) appears to be within its
mandate of “without limitation, reviewing, considering, evaluating, and making
recommendations regarding . . . any severance arrangements or agreements for
37
Id. at *6 (discussing Moore).
38
See generally Pet’rs’ Mot. to Compel Section IV.
39
2018 WL 3414163, at *7 (Del. Ch. July 13, 2018).
C.A. No. 2021-0487-LWW
September 22, 2021
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executive officers.”40 The Special Committee, rightly or wrongly, was considering
avenues to fulfill its charge.41
The inclusion of Howard, the Company’s CEO, in those discussions did not
cause a broad privilege waiver. After April 25, 2021, Howard was no longer a
subject of the Special Committee’s investigation.42 And the Special Committee
had the power to direct Company officers and employees to cooperate with it “in
connection with carrying out the intent and accomplishing the purposes” of its
authorizing resolutions.43 Given that power, it would be problematic to find that
Howard’s cooperation caused a privilege waiver entitling the petitioners to those
communications.44
40
Pet’rs’ Mot. to Compel Ex. 6. The Special Committee was also permitted to perform
“any necessary or appropriate” activities “consistent with its charter.” Id.
41
The petitioners point out that the Special Committee’s charter requires it to make a
recommendation to the Board, which had not occurred before the respondents took action
at the May 27 Meeting. That may be true. But whether the Special Committee was
acting in furtherance of its recommendation before then does not change the reality that
the petitioners were adverse and had no reasonable expectation of being included in the
Special Committee’s privileged deliberations.
42
Compare Ryan v. Gifford, 2007 WL 4259557, at *3 (Del. Ch. Nov. 30, 2007) (ordering
the production of privileged materials after disclosure to directors under investigation).
43
Pet’rs’ Mot. to Compel Ex. 6.
44
See CBS, 2018 WL 3414163, at *7 (“It would make no sense to direct these persons . . .
to cooperate fully with the Special Committees only to expose to an adverse party what
they shared with the Special Committees.”).
C.A. No. 2021-0487-LWW
September 22, 2021
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Ultimately, by April 25, 2021, a gulf had opened between the petitioners and
the respondents. Bynum and Archer were still directors of the Company, but (until
the May 27 Meeting) had agreed to leave if the terms were right. They, along with
Braden, were being advised by litigation counsel. On the other side, Howard, the
Company, and its counsel (other than Braden) were engaged in talks about how to
remove the petitioners. Regardless of whether the Special Committee and the
Company took a proper approach to effect the petitioners’ removal—which
remains to be determined—the adversity between the factions of directors is
undeniable. Bynum and Archer had no reasonable expectation that they were
entitled to Company privileged communications about any matters related to their
separation between the April 25 Removal Request and the May 27 Meeting.
Accordingly, the Motion to Compel is DENIED. To the extent necessary to
implement this decision, IT IS SO ORDERED.
Sincerely yours,
/s/ Lori W. Will
Lori W. Will
Vice Chancellor
cc: All counsel of record (by File & ServeXpress)
In Re Howard Midstream Energy Partners, LLC
Combined Opinion