Corporate Secrets and Who Can Keep Them: the Attorney-Client Privilege and Shareholders

photo - atty. client privilege by Chris PotterThis is the story of Maritza Munich and the tangled tale of WalMart, alleged bribes, Mexico, an Indiana pension trust fund, a Delaware court and the attorney client privilege. It plays out on a very large stage and could impact many shareholder lawsuits.

Ms. Munich was an in house attorney working for Walmart, according to a New York Times article. She advocated an aggressive response to investigating a scandal that the company has largely kept from public view. One way that it’s done that is invoking the attorney-client privilege to keep her from speaking publically or to law enforcement officials.

That privilege is the general rule that the conversations and communications between a client and his/her/its attorney shouldn’t be disclosed through litigation or to the public. The idea is to encourage an open conversation between the parties so the attorney can get a full picture of what the client has done and the attorney can freely advise the client. There are exceptions to this rule so there’s no total guaranty to this silence.

Ms. Munich was the general counsel of Walmart’s international division when the company found its employees might have bribed a number of Mexican officials in order to speed up the construction of some of its stores. She lead an investigation and appears to have sought to widen that investigation, but was unable to do so.

Ms. Munich resigned in 2006 in the middle of Walmart’s investigation into this Mexican affair, according to the article. After a few weeks, the investigation was “buried” by the general counsel of Walmart’s Mexico operations, a man who was later implicated in the scandal.

The Times learned about the alleged bribes, started reporting about it and Walmart later reopened its investigation. It reported the suspected misconduct in Mexico to the United States government. According to the article, Walmart has conducted a widespread investigation that has cost it $439 million as of early this year.

The investigation, as far as anyone knows, is not finished and the full story of what went on in Mexico is unknown, according to the article’s author, Steven Davidoff Solomon, a professor of law at the University of California, Berkeley. Part of the reason, according to Prof. Solomon, is Walmart has asserted that attorney-client privilege and the deliberations of Ms. Munich should be confidential.

Ms. Munich has publically stated she wants to tell her story but she has honored the privilege. That’s a wise move if she wants to continue to be a lawyer. She is now a general counsel of a company based in Puerto Rico.

A Walmart shareholder, the Indiana Electrical Workers Pension Trust Fund, started an investigation of its own to determine if any directors engaged in any wrongdoing. It requested from Walmart documents written by Ms. Munich that were either confidential or had been leaked but could not be used in court because of the privilege.

This type of request is permitted under corporate law to allow shareholders to determine if wrongdoing has taken place. Walmart denied the request, claiming protection by the attorney-client privilege and the parties ended up in court.

The Delaware Supreme Court sided with the pension trust and denied that the privilege applied, citing an exception to the privilege rule for shareholders. The court also stated “the allegations at issue implicate criminal conduct” under the Foreign Corrupt Practices Act and the pension fund was a legitimate stockholder, so the information “should be produced by Walmart pursuant to [an] exception to the attorney-client privilege.”

If misused, this privilege could be used to shield corporate law breaking but the courts are not eager to have attorney-client communications disclosed to other parties. On the other hand, as Prof. Solomon points out, Walmart is owned by its shareholders and if the corporation is doing wrong, the shareholders are the ones who are harmed when they bear the costs so they should decide whether wrongdoing occurred.

There are limits to what the pension plan trust can do. The court decision requires it keep what they find confidential unless Walmart waives the privilege. They can use the information only to decide whether to pursue a claim against the directors of Walmart for failing to adequately supervise the Mexican operations.

Though this story involves international intrigue, a multi-billion dollar corporation and potentially the violation of federal law, this story could apply to any corporation, large or small. If a shareholder can present to a judge a genuine, valid reason for seeking information and documents management claims shouldn’t be disclosed because of an attorney-client privilege, that privilege may not apply and what management thought would be secret may end up in the hands of shareholders.

If you or your business are involved in shareholder litigation, or are contemplating or may be involved in such litigation in the future, contact our office so we can talk about the situation, applicable laws and how I can help you. Litigation often turns on what information is, or isn’t, brought out into the open. We can talk about what may, or may not, be disclosed and used as evidence.