The key litigated issue in Barasch v. Williams Real Estate Co., 961 N.Y.S.2d 125 (N.Y. App. Div. 2013), was whether a corporation's director, who is also a shareholder of the company, has the absolute right to inspect the corporation's records (including attorney-client communications) after the corporation takes action that is adverse to the director's shareholding interests.

In 2009, Candace Barasch, a director-shareholder of Williams Real Estate (WRE), sued WRE to compel payment of fair value of her shares under New York Business Corporation Law Section 623. Barasch commenced the suit after WRE sold a 65% interest in the business to a third-party investor, a transaction to which Barasch had objected. The transaction closed in October 2008.

After filing suit, Barasch served discovery requests on WRE seeking all communications between WRE's transaction counsel and WRE concerning Barasch and the transaction, from January 2008 to date. WRE objected to the discovery requests, arguing that Barasch was not entitled to the attorney-client communications between WRE and its lawyers because Barasch was in an adversarial relationship with WRE. The trial court disagreed, holding that although Barasch was presently in an adversarial relationship with her co-directors and WRE, she was not in an adversarial relationship during the time period in question.

A few months later, at a deposition of WRE's in-house counsel, Barasch produced as an exhibit an e-mail dated September 24, 2008, from WRE's transaction counsel to WRE. The e-mail described Barasch as "hostile" to the transaction, and warned WRE that Barasch's attorneys could use provisions of the shareholder agreement to her benefit. WRE's counsel objected to a question about the e-mail, asserted the attorney-client privilege and demanded the document's return, claiming that it was inadvertently produced. WRE followed up a week later with a letter demanding that this e-mail, as well as an e-mail dated September 8, 2008, be returned. In the September 8 e-mail, WRE's counsel informed WRE that there was a concern that Barasch would not cooperate and sign any documents, and explained Barasch's dissenter's rights, her leverage and a possible "blackmail" scenario. In demanding return of these e-mails, WRE argued that the e-mails showed that Barasch had become adverse to her co-directors and WRE by September 8, 2008. Barasch then filed a motion to compel WRE to provide all outstanding discovery.

The trial court granted Barasch's motion to compel. It reasoned that Barasch, as a corporate director, did not become adverse to WRE by dissenting from a corporate transaction, retaining separate counsel and threatening potential legal challenges to block the transaction. Therefore, Barasch did not waive her absolute right to inspect WRE's corporate books and records, including attorney-client communications. The underpinning of the trial court's determination was that Barasch, as a director of WRE, was a corporate insider by definition and therefore could not be adverse to WRE.

On March 14, 2013, a majority panel of the Appellate Division, First Department, issued a decision reversing the trial court decision. While noting that Barasch was a director of WRE, the appeals court also noted that Barasch was a WRE shareholder suing in her capacity as a shareholder to advance her interests as a shareholder. Moreover, the appeals court found that Barasch was adverse to WRE as of September 8, 2008. Accordingly, the Appellate Division held that Barasch did not have an unqualified right to inspect WRE's books and records (including attorney-client communications between WRE and its transaction counsel) as of September 8, 2008.

Directors generally have an absolute right to inspect the books and records of the corporations on whose boards they sit. However, this right may be tempered where the director is also a shareholder of the company and has a shareholding interest adverse to the company. In this situation, corporate management should be wary of allowing the adverse shareholder-director access to the company's privileged communications. Disclosure could result in a waiver of the privilege. The fact that the shareholder is also a director does not, in this instance, afford her unlimited access to the corporation's records.