The Delaware Supreme Court issued its ruling yesterday in Espinoza v. Hurd, a case in which the plaintiff — an HP stockholder — invoked the Delaware corporate inspection statute (DGCL section 220) to inspect a report by Covington & Burling to the HP board evaluating claims of sexual harrassment by CEO Mark Hurd.
The opinion by Justice Jacobs is very narrow and very careful. In evaluating the Court’s decision affirming the denial of the plaintiff stockholder’s access to the Covington report, it is important to keep in mind, as the Court’s opinion did, that documents reflecting the actual facts bearing on the issue of whether Mr. Hurd should have been dismissed for cause had already been turned over to the plaintiff. The Court also noted, as a factual matter, that the Covington report didn’t directly address the “for cause” termination issue – and that had it done so, the case might have come out differently.
The Court of Chancery had reached the same result, but in reliance on a claim of attorney-client privilege. As against stockholders, however, that privilege is qualified, and will be applied, or not, depending on factors like the strength of the stockholder’s underlying claim and whether the information in question is otherwise available. The lower court’s result may well mirror the Supreme Court’s reasoning – particularly as it relates to the availability of key information from other sources. The major difference between the Supreme Court and the Court of Chancery, however, appears to be on the question of which mode of analysis – entitlement under Section 220 (the Delaware corporate inspection statute) and under attorney-client privilege (a common law issue) – should be applied first. The Supreme Court chose the former, believing that one should decide whether the stockholder is entitled to review the document under the inspection statute, before deciding whether a claim of privilege bars that inspection. It’s a logical preference, although it’s not clear that the result would or should have been any different, and the Supreme Court disavows any pronouncement about how the privilege issue would have been resolved.
I’d like to think that after the Disney/Ovitz litigation, the HP board devoted specific attention to whether the circumstances warranted dismissing Mr. Hurd for cause. If they did, and in light of the ultimate outcome in the Disney case, it will be a tough slog for the plaintiffs in the underlying derivative suits to win a claim against the HP directors.