Privilege Did Not Override Director’s Inspection Rights

Tuesday, April 26, 2011

Page 3

Privilege Did Not Override Director’s Inspection Rights—C.A.

By SHERRI M. OKAMOTO, Staff Writer

The First District Court of Appeal yesterday ruled that a corporation was not entitled to shield records covered by the attorney–client privilege from inspection by the director who was the subject of the communications.

In an unpublished decision, Div. One concluded that John Quinn and the corporation he helped start in 1998 were not in such an adversarial position that the privilege could override Quinn’s inspection rights.

Quinn was a founder of Aechelon Technology Inc., which was described in the decision as a “provider of visual simulation image generators, associated geospecific visual and sensor databases, [and] realistic 3D models and integration services.” He served as chief executive officer of the company until his resignation in 2006 and as chairman of its board of directors until he was involuntarily terminated in 2007, after which point Quinn continued as a member of the board.

In 2008, Quinn began making repeated requests for access to corporate records and eventually petitioned for a writ of mandate to compel inspection.

Quinn’s declaration in support of his motion for issuance of the writ stated that “[i]f needed I am prepared to voluntarily release [Aechelon] and its current directors and officers from any actions concerning my termination or any DFEH or ADEA violation connected with my termination.” He insisted that “I simply want the documents requested to insure that [Aechelon] is being properly run for the benefit of all employees and shareholders.” Quinn attached a letter from Aechelon’s attorney, advising that he was being investigated for possible breaches of his fiduciary duty as a director, to his declaration.

In opposition to the motion, Aechelon lodged among other things a declaration from its current CEO and board chairman, Ignacio Sanz-Pastor asserting Quinn had made “several hundred [e-mail] requests for information, clarifications, justifications and documents, in addition to many letters and phone calls, as well as repeated personal attacks on fellow board members.” He claimed that the “volume and frequency” of Quinn’s requests were disruptive to Aechelon’s operations.

Quinn countered that Sanz-Pastor had exaggerated the frequency of his requests for information, and reiterated his willingness to waive any wrongful termination claims. He declared that he had “offered to add other items to the list [of claims he would release], if [the corporation] would just tell me what [Aechelon] was budgeting $60,000/month to defend against,” referencing the amount the corporation had earmarked for legal fees in connection to the purported investigation of Quinn.

San Francisco Superior Court Judge Everett Hewlett Jr. granted partial writ relief, and directed the corporation to make enumerated categories of documents available for Quinn’s inspection, including attorney-client communications involving or related to Quinn’s termination which the corporation had claimed were protected by privilege, since Quinn “agreed to waive any right to use such documents in support of any claims he may assert against [Aechelon].”

Writing for the appellate court, Presiding Justice James J. Marchiano explained that directors have “the absolute right…to inspect and copy all [corporate] books, record and documents of every kind,” pursuant to Corporations Code Sec. 1602.

He noted that “California courts have recognized an exception to directors’ record-inspection rights only where ‘[a] disgruntled director unambiguously announces his or her intention to violate his or her fiduciary duties to the corporation and the shareholders by using inspection rights to…commit a tort against the corporation’ ” as in Havlicek v. Coast-to-Coast Analytical Services, Inc., (1995) 39 Cal.App.4th 1844, or where the director’s loyalties are divided and documents obtained by a director in his or her capacity as a director could be used to advance the director’s personal interest in obtaining damages against the corporation, as in Tritek Telecom, Inc. v. Superior Court, (2009) 169 Cal.App.4th 1385.

Marchiano distinguished Quinn’s situation from both of these cases since he had waived his rights to use the documents in any wrongful termination claim, there was no ongoing or threatened litigation between the parties, and there was no evidence Quinn intended to use his inspection rights to disclose confidential information or commit a tort against the corporation.

Justices Sandra L. Margulies and Robert L. Dondero joined Marchiano in his opinion.

The case is Quinn v. Aechelon Technology, Inc. A127799.