On July 23, 2014, in Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust Fund IBEW, the Delaware Supreme Court held that the Garner doctrine, which allows stockholders to invade a corporation's attorney-client privilege in order to prove fiduciary breaches by those in control of the corporation, should be applied in plenary stockholder/corporation and Section 220 books and records proceedings (No. 614, 2013, (Del. July 23, 2014).

In 2012, The New York Times published an article describing an alleged scheme of illegal bribery payments made to Mexican officials by Wal-Mart de Mexico, S.A. de C.V. (WalMex), a subsidiary of the defendant, Wal-Mart Stores, Inc. After the article was published, Wal-Mart received a letter from the Indiana Electrical Workers Pension Trust Fund IBEW (IBEW), one of its stockholders, requesting to inspect documents relating to the bribery allegations surrounding WalMex. The purpose of the demand letter, among other things, was to investigate mismanagement and possible breaches of fiduciary duty by Wal-Mart or WalMex executives relating to the bribery allegations.

In response to the demand, Wal-Mart produced over 3,000 documents to IBEW, most of which were highly redacted without any accompanying explanation for the redactions. Wal-Mart also declined to provide documents that it determined were not necessary and essential to the stated purposes in the demand or that were protected by the attorney-client privilege and work product doctrine. In response, IBEW filed a complaint in the Delaware Court of Chancery alleging deficiencies in Wal-Mart's production of documents under Section 220 of the Delaware General Corporation Law.

The Court of Chancery conducted a Section 220 trial on the papers to determine whether Wal-Mart had produced all of the documents responsive to IBEW's demand. On May 20, 2013, the Court of Chancery entered a final judgment and order that required Wal-Mart to produce additional documents, including privileged documents. In doing so, the Court of Chancery held that IBEW was entitled to documents protected by the attorney-client privilege, invoking the exception in Garner v. Wolfinbarger (430 F.2d 1093 (5th Cir. 1970)). Wal-Mart appealed, arguing that the Court of Chancery erred in ordering Wal-Mart to produce documents that "far exceed" the proper scope of a Section 220 request. Wal-Mart also argued that the Court of Chancery improperly and incorrectly applied the Garner doctrine to documents that it asserted are protected by the attorney-client privilege.

Specifically regarding Garner, Wal-Mart raised two arguments:

The Delaware Supreme Court affirmed the decision of the Court of Chancery, including its application of the Garner doctrine.

As the Delaware Supreme Court explained, the US Court of Appeals for the Fifth Circuit in Garner recognized a fiduciary exception to the attorney-client privilege. The exception stands for the principle that when a corporation is involved in a suit against its stockholders on charges of acting against stockholder interests, protection of those interests requires that the corporation’s attorney-client privilege be subject to the right of the stockholders to show good cause for why it should not be invoked in the particular situation (430 F.2d at 1103-04).

Although the Garner exception had never been explicitly adopted as a matter of Delaware law, the Supreme Court noted that it had twice "tacitly endorsed" the Garner doctrine. In one such instance, the Supreme Court in Zirn v. VLI Corp. had noted in dicta that the attorney-client privilege is not absolute and relied on the Court of Chancery's application of Garner in that litigation for that premise (621 A.2d 773, 781 (Del. 1993)). The Supreme Court also recalled three previous decisions of the Court of Chancery in which that court expressly adopted Garner as a valid exception to attorney-client privilege in the context of Section 220 books and records actions.

After reviewing the relevant jurisprudence, the Supreme Court held that the Garner doctrine should be applied in Delaware in both plenary stockholder/corporation proceedings and Section 220 actions. For Section 220 proceedings, the Supreme Court further explained that, in addition to the requisite showing of good cause set out in Garner, an inquiry as to whether the documents sought are necessary and essential for the demand must come before any privilege inquiry. The Supreme Court reasoned that the "necessary and essential" inquiry is dispositive of the threshold question of the scope of document production to which the plaintiff is entitled. The Supreme Court ruled that the Court of Chancery properly applied these steps in its order against Wal-Mart.

The Wal-Mart decision confirms for the first time that the Garner exception to attorney-client privilege is available in Delaware derivative suits, including in books and records actions. Although the Court of Chancery had already been treating the exception as if it were available under Delaware law, the confirmation of the Delaware Supreme Court brings the Garner doctrine to the fore. The decision consequently has the potential to embolden stockholder plaintiffs who contemplate bringing suits alleging breaches of fiduciary duty against boards of directors. In this regard, the decision represents something of a counter for stockholder plaintiffs in a year in which they have otherwise suffered judicial losses on issues such as the validity of fee-shifting by-laws, forum-selection by-laws and attorney fees for disclosure-only settlements in public merger lawsuits.

For more on shareholder derivative suits with emphasis on Delaware litigation, see Practice Note, Shareholder Derivative Litigation.