Published on:

Shareholders Cannot Use Attorney Client Privilege to Effect a Freeze-Out

 

Our Chicago business litigation firm recently handled a case in which one 50% shareholder allegedly tried to freeze out the other using lawyers hired by the companies owned equally by both. When our clients filed a shareholder freeze-out and breach of fiduciary duty claim and began discovery, the defendants balked, citing the attorney-client privilege to explain why they should not be required to turn over important and incriminating information.

As experienced business litigators know, this is no defense at all. Because our clients were equal shareholders in the business, we argued they were entitled to access to certain attorney communications. Furthermore, there is well-established law showing that the attorney-client privilege cannot be misused to deny discovery when the company or its officer is accused of breaching its fiduciary duty to stockholders. In other words, fiduciary duty trumps the privilege. Caselaw says a corporation may not use the privilege to shield relevant communications from discovery in an action by its own stockholders, unless there is good cause. The multipart test for good cause developed by the courts takes into account the nature of the communication, the seriousness of the allegations and other factors. Garner v. Wolfinbarger, 430 F2d 1093 (5th Cir. 1970).

The attorney-client privilege also cannot be raised when the disputed communications were made after the date the attorney and client began a fraudulent or criminal scheme that was part of the lawsuit. That is, communications about crime, fraud or torts are excepted from the attorney-client privilege. Cleveland Hair Clinic, Inc. v. Puig, 968 FSupp 1227, 1241 (ND Ill 1996). Unfortunately, we believed this to be the situation in our case.

Other exceptions to the privilege include:
• Communications to multiple clients who hired the same attorney, but who later have a legal dispute on the same matter
• Cases of legal malpractice
• Certain cases where a lawyer acts as a witness
• Cases where multiple parties make claims through the same deceased client
Of course, “piercing the veil” of corporate attorney-client privilege is not always easy; those attempting it will likely have to fight for their discovery rights. But in a freeze-out case, in which one shareholder or group of shareholders is unfairly trying to control another, this fight is essential to proving the case. DiTommaso Lubin Austermuehle handles shareholder freeze-outs and squeeze-out lawsuits for both plaintiffs and defendants in Chicago, Naperville, Wheaton, Oak Brook and throughout Illinois. If you would like to discuss how we can help you, please contact us today.