conducting corporate investigations under the increased scrutiny

Conducting Corporate InvestigationsUnder the Increased Scrutiny ofSarbanes-Oxley**

This article discusses the Sarbanes-Oxley Act and the Act’simpact on corporate governance, corporation’s internal investi-gations, attorney-client privileges, attorney work-product, andother issues. The author further asserts that corporate investiga-tions have become a necessary part of conducting business.Finally, the author concludes that audit committee directors inpublic companies should anticipate spending more time in ful�ll-ing their duties and look for added guidance.

By Orrin Harrison, III

Introduction1

The SEC has long discussed the high responsibilities a publicly-held company Board of Directors has in corporate governance. Wellbefore the debates leading to the Sarbanes-Oxley Act of 2002, theSEC had pronounced:

The Commission considers it essential for board members tomove aggressively to ful�ll their responsibilities to oversee theconduct and performance of management and to ensure that thecompany’s public statements are candid and complete. The Com-mission has long viewed the issue of corporate governance andthe �duciary obligations of members of management and theboards of directors of public companies to their investors as an is-sue of paramount importance to the integrity and soundness ofour capital markets. [citation omitted]. These obligations areparticularly acute where potential violations of the federal securi-ties laws involving self-dealing and fraud by management are

**Orrin Harrison, III, Partner, Akin, Gump, Strauss, Hauer & Feld LLP,1700 Paci�c Avenue, Suite 4100, Dallas, Texas 75202.

1Mr. Harrison expresses his appreciation to Todd Murray, an associate atVinson & Elkins, LLP, for his considerable assistance in the research andwriting of this paper.

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called to the attention of the board of directors. In this case, [the]Board failed to satisfy its obligations when confronted by seriousindications of management fraud.2

With the passage of Sarbanes-Oxley, a new far reaching securi-ties act is on the books. Whereas the Private Securities LitigationReform Act of 1995 and the Securities Litigation Uniform Stan-dards Act of 1998 were largely enacted to protect publicly-heldcompanies and auditors from ‘‘strike’’ suits, Sarbanes-Oxley isclearly a reaction to the collapse of Enron, WorldCom and othermajor corporate scandals, which continue on today. As with the se-curities acts which initiated federal securities markets regulation,the Securities Act of 1933 and the Securities Exchange Act of 1934,much of the impact of Sarbanes-Oxley will be the subject of litiga-tion for many years to come. Remember that it was the United StatesSupreme Court decisions in Ernst & Ernst v. Hochfelder in 1976dealing with scienter and numerous Supreme Court cases thereafterde�ning materiality, aider and abettor liability, fraud on the market,and reliance in the 1980’s and 1990’s which provided de�nitive in-terpretation of the 1934 Act. This article is intended to provide auditcommittees operating under Sarbanes-Oxley with guidance fromexisting case law on the proper procedures to conduct an internalcorporate investigation.

Section 1: The empowerment of audit committeesunder Sarbanes-Oxley

Sarbanes-Oxley makes clear who is charged with the responsibil-ity of audit oversight—the audit committee which is also composedof independent directors.

(2) RESPONSIBILITIES RELATING TO REGISTERED PUBLIC AC-COUNTING FIRMS.—The audit committee of each issuer, in itscapacity as a committee of the board of directors, shall be directlyresponsible for the appointment, compensation, and oversight of thework of any registered public accounting �rm employed by that issuer(including resolution of disagreements between management and theauditor regarding �nancial reporting) for the purpose of preparing orissuing an audit report or related work, and each such registered publicaccounting �rm shall report directly to the audit committee.

Pub. L. 107–204, Section 301.

2Report of Investigation in the Matter of the Cooper Companies, Inc. as itRelates to the Conduct of Cooper’s Board of Directors, 1991 WL 707149,Exchange Act Release No. 34–35082 (Dec. 12, 1994).

300 SECURITIES REGULATION LAW JOURNAL


Sarbanes-Oxley further creates a broad procedure for the handlingof complaints regarding accounting and auditing issues.

(4) COMPLAINTS.—Each audit committee shall establish proceduresfor—(A) the receipt, retention, and treatment of complaints received by the

issuer regarding accounting, internal accounting controls, orauditing matters; and

(B) the con�dential, anonymous submission by employees of the is-suer of concerns regarding questionable accounting or auditingmatters.

Pub. L. 107–204, Section 301.The authority to investigate these complaints and others that

might infringe on the �nancial aspects of a company is clearlyplaced with the audit committee.

(5) AUTHORITY TO ENGAGE ADVISERS.—Each audit committeeshall have the authority to engage independent counsel and other advis-ers, as it determines necessary to carry out its duties.

Pub. L. 107–204, Section 301.The responsibilities of the company to provide the audit commit-

tee with the necessary funding to carryout its duties is alsoaddressed.

(6) FUNDING.—Each issuer shall provide for appropriate funding, asdetermined by the audit committee, in its capacity as a committee ofthe board of directors, for payment of compensation—(A) to the registered public accounting �rm employed by the issuer

for the purpose of rendering or issuing an audit report; and(B) to any advisers employed by the audit committee under paragraph

(5).Pub. L. 107–204, Section 301.What Sarbanes-Oxley does not provide however is a methodol-

ogy, procedure or standard for conducting those investigations.

Section 2: Investigating allegations of self-dealing,fraud, or accounting misconduct

Internal investigations may be prompted by government action,by the press, by employee inquiries, or by shareholder inquiries ordemands. A duty to investigate may arise under a director’s normal�duciary duties. In the context of a public corporation’s �nancialreporting process, directors have a duty under the federal securitieslaws to oversee and investigate when information comes to their at-tention indicating that the corporation’s management may haveengaged in fraud, or that the corporation’s prior public statements

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may be inaccurate.3 In addition, outside directors must maintain ageneral familiarity with the corporation’s public disclosures and ac-counting practices and investigate ‘‘red �ags’’ indicating that thecorporation’s public disclosures may be false or misleading.4

Outside directors cannot blindly rely on management to makedisclosure decisions.5 They must act aggressively to ensure thattheir corporation’s public statements are candid and complete.6

Derivative suits occur when a shareholder believes that in�uenceor improper interest prevents a board of directors from decidingwhether to investigate and bring suit on behalf of the corporation.Normally, the management of a corporation is entrusted to its Boardof Directors.7 Directors, not shareholders, decide whether to initiateand/or pursue litigation on corporation’s behalf, and directors’ deci-sions generally fall under the broad discretion of the Business Judg-ment Rule. However, a shareholder can temporarily suspend theBoard’s management powers and initiate a derivative action withoutBoard approval when in�uence or interest prevents the Board fromdeciding what is truly in the best interest of the corporation.8 This

3In the Matter of Rita Schwartz Respondent, Exchange Act Release No. 34–42684, 2000 WL 376146 (April 13, 2000); Report of Investigation in the Mat-ter of the Cooper Companies, Inc., Exchange Act Release No. 34–35082,1994 WL 707149 (Dec. 12, 1994); Report of Investigation in the Matter ofNational Telephone Co., Exchange Act Release No. 34–14380, 1978 WL171339 (Jan. 16, 1978).

4Report of Investigation in the Matter of National Telephone Co., ExchangeAct Release No. 34–14380 (Jan. 16, 1978); Report of the Investigation in theMatter of Stirling Homex Corp., Exchange Act Release No. 34–11516, 1975WL 163038 (July 2, 1975).

5Report of Investigation in the Matter of National Telephone Co., Inc.,Exchange Act Release No. 34–14380 (Jan. 16, 1978).

6Report of Investigation Pursuant to Section 21(A) of the SecuritiesExchange Act Of 1934 Concerning the Conduct of Certain Former O�cersand Directors of W.R. Grace & Co., Exchange Act Release No. 34–39157,1997 WL 597984 (Sept. 30, 1997); Report of Investigation in the Matter of theCooper Companies, Inc., Exchange Act Release No. 34–35082, 1994 WL707149 (Dec. 12, 1994).

7See, e.g., Delaware General Corporation Law Section 141.8McKee v. Rogers, 156 A. 191, 193 (Del. Ch. 1931) (A stockholder may ini-

tiate ‘‘a cause of action in behalf of the corporation, without demand upon theDirectors to sue, when it is apparent that the demand would be futile, that theo�cers are under an in�uence that sterilizes discretion and could not be properpersons to conduct the litigation’’). Under Section 5.14C of the Texas Busi-



creates a situation in which a shareholder, frequently a disgruntledone, is acting on a corporation’s behalf.

I. Initiating the investigation

If directors believe an investigation to be warranted, they mustface di�cult questions. What will be the scope of the investigation?Who should conduct the investigation? How much will the investi-gation cost? The directors’ answers to these questions undoubtedlywill be viewed with 20–20 hindsight by the government, by thepress, and by the courts. Conducting internal investigations is also adelicate process. Directors may face institutional friction. The act ofconfronting (and opposing) management, as sometimes may be thecase, can be daunting. Moreover, investigations can lead to defama-tion claims by employees.9

Directors must consider the investigation’s potential advantagesand disadvantages, each of which could be substantial.10 The advan-tages include:

(1) providing a diligent and impartial determination of whether wrongdo-ing occurred and what, if any, corrective action is required;

(2) o�ering a less costly investigation that may convince governmentalentities not to pursue a more costly and distracting investigation;

(3) providing a factual basis for claims against the wrongdoer; and

(4) providing directors with the information they need to e�ectively

ness Corporation Act, shareholders of Texas Corporations generally cannotinitiate suit without making demand, and pleading futility no longer excusesdemand:

C. Demand. No shareholder may commence a derivative proceeding until:(1) a written demand is �led with the corporation setting forth with

particularity the act, omission, or other matter that is the subject ofthe claim or challenge and requesting that the corporation takesuitable action; and

(2) 90 days have expired from the date the demand was made, unlessthe shareholder has earlier been noti�ed that the demand has beenrejected by the corporation or unless irreparable injury to thecorporation is being su�ered or would result by waiting for theexpiration of the 90-day period.

9See Koniko� v. Prudential Ins. Co., 234 F. 3d 92 (2d Cir. 2000) (defama-tion claim brought when report dismissed employee’s claims as unfounded).

10Johnathan R. Tuttle, Internal Corporate Investigations and the SEC’sMessage to Directors in Cooper Co., 65 U. Cin L. Rev. 75 (1996).



exercise their business judgment, including supplementing and/or cor-recting public disclosures.11

The disadvantages include:(1) a�ecting company morale in a negative way;

(2) absorbing substantial expenses related to the investigation; and

(3) discovering negative information that could lead to shareholderlitigation.12

Despite the disadvantages, however, recent business events suggestthat the advantages to an investigation frequently will outweigh thedisadvantages.

Deciding to conduct an internal investigation generally does not,in and of itself, ful�ll the directors’ obligations. In fact, an incom-plete investigation can be as harmful, or more so, than not havingconducted an investigation at all. The SEC’s Cooper CompaniesReport shows how not to conduct an investigation, and conversely,what is required at the outset to promote a successful investigation.13

In light of this guidance, directors should:

D Quickly initiate an investigation upon learning of possible self-dealing, fraud, misrepresentations, inaccurate disclosures, etc.

D Be cautious about issuing press releases containing blanketdenials prior to the completion of any investigation.

D Meet outside the presence of any alleged wrongdoers toconsider what action the corporation should take.

D Consider carefully whether to permit the alleged wrongdoersto remain in positions with the corporation or to continue toreceive bene�ts or compensation from the corporation duringthe course of the investigation.14

Needless to say, the involvement of counsel is essential in theseimportant early-stage steps and decisions.

Having decided to approve an investigation, the directors mustdecide who should do it. Letting management conduct an investiga-tion is generally not an acceptable choice. First, management maynot possess the requisite legal training either to appreciate theproblems associated with the wrongdoing or to discern whether

11Id.12Id.13Id.14Id.



wrongdoing has occurred.15 Second, management’s independencecan be questioned.16 Third, investigations conducted without counseldo not o�er the attorney-client privilege and work product that mayprove useful if litigation ensues.17 Using in-house counsel can solvesome, but not all, of these problems.18 As a result, retaining outsidecounsel and independent consultants and/or accountants may, inmany instances, be the best strategy.19

II. The special litigation committee

Courts and subsequently state legislatures have adopted a mecha-nism for a corporation to regain control over the investigation andprosecution of a derivative claim, even if a corporation’s full Boardof Directors is not in a position to disinterestedly evaluate a potentiallawsuit. This mechanism was �rst created by the Delaware SupremeCourt’s holding in Zapata Corporation v. Maldonado.20 Under thisholding, a Board of Directors tainted by in�uence may delegate itsexclusive powers to manage corporate litigation to a committee ofdisinterested directors.21 These disinterested directors, known as a‘‘Special Litigation Committee’’ or ‘‘SLC’’, can then properly actunder Section 141 to investigate and determine the course of the de-rivative litigation. It is this SLC mechanism engrafted into an auditcommittee’s responsibilities under Sarbanes-Oxley that provides atleast some guidance into the process, methodology, and protectionsfor an internal investigation.

If the SLC investigates the grounds for the suit and decides tomove to dismiss the suit, the court following Delaware law must ap-ply a two-step framework when deciding whether to grant such amotion:

1. First, the Court should inquire into the independence and good faith ofthe committee and the bases supporting its conclusions. In this inquiry,the committee has the burden of proof. If the Court is satis�ed that thespecial litigation committee was independent and showed reasonable

15Id.16Id.17Id.18Id.19Id.20430 A.2d 779, 786 (Del. 1981).21Id. at 788.



bases for good faith �ndings and recommendations, the Court mayproceed to the next step.

2. Second, the Court has the discretion, but not the obligation, to apply itsown business judgment to determine whether the motion should begranted. This step is designed to thwart instances where corporate ac-tions meet the criteria of step one, but the result does not appear tosatisfy its spirit, or where corporation actions would prematurelyterminate a stockholder grievance deserving of further consideration inthe corporation’s interest.22

Alternatively, the SLC could decide to pursue the litigation or allowthe plainti� to do so.23

Article 5.14 of the Texas Business Corporation Act (‘‘TBCA’’)provides a mechanism similar to that outlined in Zapata. There are,however, a few notable di�erences. These are:

1. a demand requirement (Section C);2. a speci�c stay mechanism (Section D(1));3. speci�c discovery limitations (Section D(2));4. the elimination of the second prong of the Zapata procedure that al-

lows the Court to substitute its business judgment (Section F);5. the option to request that a Court appoint two non- directors to serve as

the SLC (Section H(3)); and6. a mechanism for payment of attorney’s fees and expenses by the

corporation if the proceeding resulted in substantial bene�t, and by theplainti� if the action was brought or maintained for an improperpurpose (Section J).

Sections D (Discovery), I (Discontinuance), and J (Payment of Ex-penses), ‘‘which are procedural in nature,’’ apply to suits againstforeign corporation maintained in Texas Courts.24 Otherwise, a de-rivative proceeding brought in the name of a foreign corporation isgoverned by the laws of the jurisdiction of incorporation of theforeign corporation.25

III. Invoking Zapata

The general procedure for invoking Zapata (or TCBA Article

22A Court should apply its own business judgment under the second steponly if the result reached by the SLC is ‘‘irrational’’ or ‘‘egregious.’’ CarltonInvestments v. TLC Beatrice International Holdings, Inc., 1997 WL 305829,*2 (Del. Ch. May 30, 1997); see also Zapata Corp., 430 A.2d at 788–89.

23Id. at 788.24TEX. BUS. CORP. ACT art. 5.14K.25These three procedural sections may provide tactical options to a corpora-

tion that in many cases may otherwise be unavailable if the suit had beenbrought in a di�erent forum.



5.14) begins with the appointment and empowerment of the SLC bythe corporation’s Board. After appointment, the SLC retainscounsel, and moves to stay discovery during the course of its intakeinvestigation. The SLC conducts an investigation, frequently withthe assistance of lawyers and other professionals. After its review,the SLC issues a report containing its �ndings and ultimate conclu-sion to the Board, the plainti�, and the court. Based on its recom-mendations, the SLC then moves to either permit the lawsuit tocontinue, adopt the claims and proceed on the lawsuit on thecorporation’s behalf or move to dismiss. As discussed below,however, the devil is in the details.

A. The empowering resolutions

To be e�ective, an SLC must be independent. This independenceincludes both procedural and substantive independence. Accord-ingly, the resolution empowering the SLC also must make clear thatthe Board is delegating to the SLC full managerial power concern-ing the derivative claim. One example is, in relevant part, as fol-lows:

WHEREAS, the Board of Directors wishes to appoint a specialcommittee (the ‘‘SLC’’) to investigate the basis for the Deriva-tive Litigation in accordance with Texas and Delaware law and todetermine what action, if any, should be taken and to report itsconclusions to the Board of Directors; andIT IS THEREFORE RESOLVED, that [the SLC members] beand they hereby are appointed to serve as members of the SLC ofthe Board of Directors to investigate the facts and allegationsupon which the Derivative Litigation is based, and to determinewhether the continuation of the Derivative Litigation is in thebest interests of the Company, what role the Company shouldplay in the Derivative Litigation, such determination to be �naland binding upon the Company; andRESOLVED FURTHER, that the SLC shall continue in existenceuntil such time as the SLC shall recommend its dissolution to theBoard of Directors; andRESOLVED FURTHER, that the SLC be and hereby is autho-rized to retain, at Company expense, such independent counseland other experts of its choice as it shall deem necessary to makeits determination.

Any attempt here to predetermine an outcome or limit the SLC’sauthority will likely prove disastrous. While management and theexisting Board may loathe delegating their powers and place such



broad authority in a truly independent body, such a mechanism mayprove both less costly and less distracting than litigating merits of alawsuit against a disgruntled shareholder.

B. The independence of the SLC

SLC members must be independent of the transaction that is at is-sue in the derivative claim, and should be free from the in�uence ofother Board members and management. If necessary, the corpora-tion may wish to consider appointing two new Board members toproceed with the investigation. As the independence of the SLC willbe the subject of intense scrutiny, overlooking key details or at-tempting to predetermine an outcome by appointing the wrongindividuals could simply waste the corporation’s time and money.

1. The independence test

A director is independent when he is in a position to base his de-cision on the merits of the issue rather than be governed by extrane-ous considerations or in�uences.26 When applying this standard to aspecial litigation committee’s decision to terminate derivative liti-gation, the court must examine the totality of the circumstances.27

These circumstances include:

D A committee member’s status as a defendant and potential li-able party,

D A committee member’s participation in or approval of the al-leged wrongdoing,

D A committee member’s past or present business dealing for thecorporation,

D A committee member’s past or present business or social deal-ings with the individual defendants,

D The number of directors on the committee, and

D The structural bias of the committee.28

In addition, courts have indicated that the appointment of an inde-

26Kaplan v. Wyatt, 499 A.2d 1184, 1189 (Del. 1985).27Strougo v. Padegs, 27 F. Supp. 2d 442, 448 (S.D.N.Y. 1998) (applying

Delaware law).28In re Oracle Securities Litig., 852 F. Supp. at 1441 (citing Kaplan, 499

A.2d 1184).



pendent counsel is a factor supporting a �nding of independence.29

However, independence does not require the complete absence ofany facts that might point to non-objectivity.30

In Kaplan, the court held that an oil company’s two-memberspecial litigation committee acted independently even though one ofthe committee members was on the Board of Directors at the timethe issue arose, had investments and a�liation with the companiesconducting substantial business with the corporation, may have hada bias in favor of oil company executives, and worked directly withthe corporation’s o�cer when conducting the investigation.31 Thecourt sided with the SLC because the plainti� failed to show howany of these factors prevented the committee member or the SLCfrom basing their decisions on the corporate merits of the issues.32

The Kaplan court concluded that the mere fact that the committeemember was on the board when the actions at issue arose occurreddoes not suggest that he did not make a disinterested judgment onwhether the litigation should proceed.33 The court noted that thisnon-presumption would apply even if the committee memberoriginally approved the contested actions.34 The court also reasonedthe committee member’s a�liation with the entities transacting busi-ness with the corporation did not take the independence becausethere was no evidence that personal dealings between the committeemembers and the corporation in�uenced his judgment.35 The courtstated that the plainti�s’ general allegations of bias in favor of oilcompany executives were insu�cient to show interest because aplainti� did not show how such bias was outcome determinative.36

In addition, the court concluded that direct participation by corporateo�cers and counsel in the SLC’s investigation did not preventindependence.37 Although the court admitted the practice is notrecommended, it ultimately decided that the corporation’s participa-

29E.g., Strougo, 27 F. Supp. 2d at 451.30In re Oracle Securities Litig., 852 F. Supp. at 1442.31499 A.2d at 1180.32Id.33Id.34Id.35Id.36Id.37Id.



tion was not fatal to the investigation because the plainti� failed toshow that the presence of the corporate o�cers in�uenced those be-ing interviewed altered the outcome of the investigation, or impairedthe independence of the committee’s investigation.38

Other courts have followed Kaplan’s lead. In Bach v. NationalWestern Life Insurance Co., the Fifth Circuit held that there was nofact issue regarding the independence of an insurance company’stwo-person special litigation committee even though both memberswere executives of some other insurance companies, voted to reim-burse directors for litigation expenses, and attended a semi-socialmeeting with interested parties at a resort.49 In Strugo, the courtfound a two-member special litigation committee acted indepen-dently despite the fact that one of the committee members wasinitially named as a defendant, approved the transaction in question,had strong loyalties to a foreign country, and arguably had personalor family ties with one of the defendants and the other member wasrecommended by an interested law �rm.40 In reaching its conclu-sion, the court noted that ‘‘if independent litigation committees areto be utilized, courts must accept the likelihood that its memberswill have experiences similar to that of defendant directors.’’41

Notwithstanding the foregoing authority, the best procedure gen-erally would be to identify truly independent board members to con-stitute the SLC. This procedure limits questions from the court,potential inquiries of a plainti�’s counsel, and a plainti�’s ability toargue against the independence of the committee.

38Id.49810 F.2d 509, 512–513 (5th Cir. 1987). But see Louis F. Fuqua, 502 A.2d

962, 935–936 (Del. Ch. 1985) (holding that, when considered as a whole, thefact that the sole member of the Special Litigation Committee was a memberof the board at the time the actions challenged occurred, was defendant in thesuit, had numerous �nancial and political dealings with the company’s CEO,and was President of a university which had received substantial contributionsfrom the company, raised a question of fact as to whether the member couldact independently because ‘‘if a single committee member is to be used, themember should, like Caesar’s wife, be above reproach’’).

4027 F. Supp. 2d at 449–451.41Id. at 449.



2. Independence under Sarbanes-Oxley

NYSE-listed companies

‘‘No material relationship.’’ Under the proposed NYSE listingstandards, no director quali�es as ‘‘independent’’ unless the boardof directors a�rmatively determines that the director has ‘‘no mate-rial relationship’’ with the listed company, either directly or as apartner, shareholder or o�cer of an organization that has a relation-ship with the company. The basis for the determination must bespeci�cally disclosed in the company’s annual proxy statement.Material relationships can include commercial, industrial, banking,consulting, legal, accounting, charitable and familiar relationships.

Five-year ‘‘cooling-o�’’ period. The NYSE has set forth anumber of categories that have a presumption of non-independenceif a director falls within the parameters of such categories. In gen-eral, there is a �ve-year cooling-o� period before a director can bepresumed to be independent if the director falls within one of thesecategories. A director who receives, or whose family memberreceives, more than $100,000 per year in direct compensation fromthe company (other than board and committee fees or pension funds)is not presumed to be independent until �ve years after such directorceases to receive more than $100,00 per year in such compensation.The company’s board of directors may negate this presumption ifthe board determines (and no independent director dissents) that,based upon the relevant facts and circumstances, such compensa-tory relationship is not material. Such determination also must bedisclosed in the company’s proxy statement. There is also a �ve-year cooling-o� period before the following persons qualify as in-dependent: (i) a director (or his or her family member) who is a�li-ated with or employed by a present or former auditor of thecompany; (ii) a director (or his or her family member) who isemployed as an executive o�cer of another entity where any of thelisted company’s present executive o�cers served on that entity’scompensation committee; or (iii) a director who is an executive of-�cer or employee (or whose family member is an executive o�cer)of another entity that accounts for at least 2 percent or $1 million,whichever is greater, of the listed company’s consolidated grossrevenues or for which the listed company accounts for the samethreshold of the other entity’s consolidated gross revenues.

Transition rule for director independence test. The NYSE-



proposed listing standard with respect to categories that have apresumption of non-independence will not be applied retroactively,but will apply prospectively from the e�ective date of the listingstandard. Thus, if a director earned in excess of $100,000 in 2002,as long as such compensation level does not extend past the e�ec-tive date of the listing standard, there is no presumption of non-independence that would attach to that director. This transition rulewill allow certain directors to be deemed independent who otherwisewould be presumed to be non-independent if the �ve-year look-back period was applied retroactively.

Large shareholders may be independent. The NYSE has notedthat ownership of even a signi�cant amount of stock, by itself,should not be a bar to a �nding of independence. However, exceptin the context of the audit committee discussed below, there is no‘‘bright line’’ test with respect to the level of stock ownership fordetermining a director’s ‘‘independence.’’

NASDAQ-listed companiesNo interference with independent judgment. NASDAQ’s pro-

posed rules provide that an independent director is a person otherthan an o�cer or employee of the company or its subsidiaries or anyother individual having a relationship that, in the opinion of thecompany’s board of directors, would interfere with the exercise ofindependent judgment in carrying out the responsibilities of adirector. Similar to the NYSE, NASDAQ has stated in its proposedrules that ownership of company stock by itself should not precludethe board from concluding that such shareholder/director isindependent.

Persons who are not independent. Under NASDAQ’s proposedrules, the following persons are not considered independent:

D a director who is or within the past three years has beenemployed by the company or by any parent or subsidiary of thecompany.

D a director who accepts or who has a family member who ac-cepts any payments from the company or any parent or subsid-iary of the company in excess of $60,000 during the current�scal year or any of the past three �scal years, other than:

D (i) compensation for board service;

D (ii) payments arising form investments in the company’s se-curities;



D (iii) compensation paid to a family member who is an em-ployee of the company or its a�liates (provided that suchfamily member is not an executive o�cer of the company orits a�liates); or

D (iv) bene�ts under a tax-quali�ed retirement plan or non-discretionary compensation.

D a director who is a family member of an individual who is, orwithin the past three years was, employed by the company orany parent or subsidiary of the company as an executive o�cer.

D a director who is a partner in, or controlling shareholder or anexecutive o�cer of, any organization to which the companymade, or from which the company received, payments (otherthan those arising solely in investments in the company’s secu-rities) that exceed the greater of 5 percent in the company’s ororganization’s consolidated gross revenues for that year, or$200,000, whichever is greater, in the current �scal year or anyof the past three years.

D a director of a listed company who is employed as an executiveo�cer of another entity where any of the executive o�cers ofthe listed company serve on the compensation committee ofsuch other entity, or if such a relationship existed within thepast three years.

D a director who is or was a partner or employee of the company’soutside auditor and worked on the company’s audit engage-ment within the past three years.

Sarbanes-Oxley and SEC-proposed rule

Fee prohibition. The Sarbanes-Oxley Act and the SEC-proposedrule implementing Section 301 thereof prohibits audit committeemembers of listed companies from accepting, directly or indirectly,any consulting, advisory or other compensatory fees from thecompany (other than fees for being a director or audit committeemember). An indirect payment includes any fees paid to a familymember of the director or to an entity in which such director is apartner, member or principal and which provides accounting,consulting, legal, investment banking, �nancial or other advisoryservices or any similar services to the company.

Not an ‘‘a�liate.’’ An audit committee member of a listedcompany cannot be ‘‘a�liated’’ with the company or a subsidiaryof the company. The SEC-proposed rule de�nes ‘‘a�liate’’ of, or a



person ‘‘a�liated’’ with, a speci�ed person, as a person whodirectly, or indirectly through one or more intermediaries, controls,or is controlled by, or is under common control with, the speci�edperson. The SEC has proposed to de�ne ‘‘control"—consistent withits other uses of such term in the Exchange Act—as the possession,direct or indirect, of the power to direct or cause the direction of themanagement and policies of a person, whether through the owner-ship or voting securities, by contract or otherwise. A director, exec-utive o�cer, partner, member, principal or designee of an ‘‘a�li-ate’’ also will be deemed to be an ‘‘a�liate’’ of the company.

Notably, the SEC has proposed a safe harbor for determiningwhether an audit committee member is an ‘‘a�liated’’ person of thecompany. A committee member who is not an executive o�cer,director or shareholder of more than ten percent of any class of thecompany’s equity securities will not be deemed to control thecompany. Therefore, private equity funds that own ten percent orless of a portfolio company will be able to rely on the SEC’sproposed safe harbor and will not be deemed to be ‘‘a�liated’’ withthe company, provided that such private equity funds, as well astheir representatives, meet the compensatory prong of the proposedrule (discussed in the preceding paragraph). Private equity fundsthat own more than ten percent of a portfolio company’s stock willbe ineligible to rely on the proposed safe harbor, but may still relyon a facts-and-circumstances analysis if such funds believe that theydo not control the portfolio company. Listed companies shouldunderstand that the SEC’s proposed rule applies solely to the inde-pendence of audit committee members and not to the general inde-pendence of directors who do not serve on a company’s auditcommittee.

Section 3: Creating and preserving privileges

One of the keys to conducting a successful corporate investiga-tion is knowing what privileges can be preserved, and how topreserve them. Indeed, communications intended to be privilegedthat prove otherwise can be quite damaging.

A. The attorney-client privilege

1. The subject matter of the communication

The attorney-client privilege under normal circumstances extends



only to communications made for the purpose of the rendition ofprofessional legal services. The attorney must be acting in his capac-ity as a lawyer.42 ‘‘This showing is ‘necessary to prevent corpora-tions from shielding their business transactions from discoverysimply by funneling their communications through a licensedattorney.’’’43 Furthermore, ‘‘where the attorney acts as a negotiatoror business agent for his client, the con�dential communications be-tween them are not privileged.’’44 Counsel conducting corporateinvestigations also must consider the applicability of Garner v.Wol�nbarger, which held that otherwise privileged communica-tions between counsel and corporate clients may, under certain cir-cumstances, be discovered by plainti�s in shareholder litigation.45

The privilege protects communications (both written and oral)between the lawyer and client, but does not protect the underlyingfactual information.46 In Upjohn, the United States Supreme Courtexplained this di�erence:

[T]he protection of the privilege extends only to communicationsand not to facts. A fact is one thing and a communication concern-

42TEX. R. EVID. 503(b); see also United States v. Horvath, 731 F.2d 557(8th Cir. 1984)(noting that privilege is not applicable when attorney is actingas a scrivener, business adviser or a conduit for client’s funds); In re SealedCase, 737 F.2d 94, 99 (D.C. Cir. 1984) (holding that communications areprivileged only ‘‘upon a clear showing that [the communications were given]in professional legal capacity,’’ rather than in a business capacity); Cathey v.State, 467 S.W.2d 472, 473–74 (Tex. Crim. App. 1971) (attorney acting as abail bondsman); Clayton v. Canida, 223 S.W.2d 264, 266 (Tex. Civ. App.—Texarkana 1949, no writ) (attorney acting as accountant); Pondrum v. Gray,298 S.W. 409, 412 (Tex. Comm’n App. 1927, holding approved) (attorneyacting as a ‘‘conveyancer’’); Childress v. Tate, 148 S.W. 843, 844 (Tex. Civ.App.—Fort Worth 1912, writ ref’d) (attorney acting as a scrivener). The priv-ilege typically protects communications (both written and oral) between thelawyer and client, but does not protect the underlying factual information.Methodist Home v. Marshall, 830 S.W.2d 220, 231 (Tex. App.—Dallas 1992,no writ).

43Teltron, Inc. v. Alexander, 132 F.R.D. 394, 396 (W.D. Pa. 1989); see alsoGreat Plains Mut. Ins. Co. v. Mutual Reinsurance Bureau, 150 F.R.D. 193,197 (D. Kan. 1993) (‘‘the mere fact that an attorney was present during theboard of directors’ meetings does not, in and of itself, shield disclosure’’).

44J.P. Foley & Co., Inc. v. Vanderbilt, 65 F.R.D. 523, 526 (S.D.N.Y. 1974).45430 F.2d 1093, 1103–1104 (5th Cir. 1970), cert. denied, 401 U.S. 974

(1971).46Methodist Home, 830 S.W.2d at 231; see also Upjohn Co. v. United States,

449 U.S. 383, 395 (1981) (applying federal attorney-client privilege).



ing that fact is an entirely di�erent thing. The client cannot becompelled to answer the question, ‘‘What did you say or write tothe attorney?’’ but may not refuse to disclose any relevant factwithin his knowledge merely because he incorporated a statementof such fact in his communication to his attorney.47

The Upjohn Court concluded that even though communicationsfrom the client’s employees to the attorneys were privileged, the op-posing party was free to question the employees about the factsunderlying the dispute.

2. The parties to the communication

To be protected, a communication must fall within one of the fol-lowing speci�c categories:

(1) between the client or the client’s representative and the lawyer and thelawyer’s representative;

(2) between the lawyer and the lawyer’s representative;

(3) by the client or the client’s representative or his lawyer or a representa-tive of a lawyer to a lawyer, or a representative of a lawyer represent-ing another party in a pending action and concerning a matter of com-mon interest therein;

(4) between representatives of the client or between the client and a repre-sentative of the client; or

(5) among lawyers and their representatives representing the same client.48

A ‘‘representative of the client’’ includes ‘‘any person who, for thepurpose or e�ectuating legal representation for the client, makes orreceives a con�dential communication while acting in the scope ofemployment for the client.’’49

The Upjohn rationale was applied to a corporate investigation inthe oft cited case authored by then District Judge Pat Higginbotham,In re LTV Securities Litigation.50 Judge Higginbotham recognized

47449 U.S. at 395–96 (citations omitted)(emphasis in original).48TEX. R. EVID. 503(b); see also Upjohn, 449 U.S. at 394 (discussing par-

ties to the communication).49TEX. R. EVID. 503(a)(2); see also Upjohn, 449 U.S. at. 394 (extending

the privilege to communications made between lower echelon employees andcorporate counsel for the purpose of securing legal advice for the corporationwhen the lower echelon employees possessed information that was importantin securing legal advice for the corporation and was not available to uppermanagement).

5089 F.R.D. 595 (N.D. Tex. 1981).



that attorneys should not act as conduits for non-privilegedinformation. When attorneys obtain information as a necessary partof an investigation to give legal advice, however, the privilegeattaches. ‘‘The focal point is the purpose of the lawyer in gatheringthe data.’’51

3. Con�dentiality

The attorney-client privilege protects only ‘‘con�dential’’communications.52 ‘‘A communication is ‘con�dential’ if not in-tended to be disclosed to third persons other than those to whomdisclosure is made in furtherance of the rendition of professionallegal services to the client or those reasonably necessary for thetransmission of the communication.’’53 The determination ofcon�dentiality focuses on intent, and courts generally look at thecircumstances surrounding the communication to determine thatintent.54 As a general rule, the attorney-client privilege does notextend to communications knowingly made in the presence of thirdparties.55 Subsequent disclosure, even information ‘‘leaked’’ by

51Id. at 603 (emphasis added).52The communications revolution has posed still unanswered questions

about the privilege that attaches to attorney-client communications carriedover electronic media. See David Hricik, Con�dentiality and Privilege inHigh-Tech Communications, 60 Tex. Bar J. 104 (1997); American Bar As-sociation Commission on Ethics and Professional Responsibility, Formal Eth-ics Op. 99–413 (1999) (noting the con�icting judicial and state bar opinionsregarding cellular and cordless communications); Stuart J. Chanen, ‘‘Returnto Sender’’ Won’t Cut It, A.B.A. J. 85 (March 1998); B. WRIGHT, THE LAWOF ELECTRONIC COMMERCE (2d ed. 1995) at ET2:3–5. See generallyJoan C. Rogers, Ethics, Malpractice Concerns Cloud E-mail, On-Line Advice,ABA/BNA Manual on Prof. Conduct (March 6, 1996).

53TEX. R. EVID. 503(a)(5) (emphasis added).54See Duval County Ranch Co. v. Alamo Lumber Co., 663 S.W.2d 627, 634

(Tex. App.—Amarillo 1983, writ ref’d n.r.e.) (‘‘proof, express or by circum-stances, must indicate desire in client for con�dence and secrecy’’).

55See e.g., Ledisco Financial Services, Inc. v. Viracola, 533 S.W.2d 951,959 (Tex. Civ. App.—Texarkana 1976, no writ) (�nding no privilege becausethe client made the statement in the presence of a third person). Note thatTEX. R. EVID. 503(a)(5) contemplates that some communications to thirdparties will not defeat the privilege: (1) disclosures made to third parties infurtherance of the rendition of professional legal services to the client and (2)disclosures to third parties reasonably necessary for the transmission of thecommunication. Professors Goode and Sharlott posit that the �rst exception



directors or o�cers, may e�ectively destroy the privilege.56 As aresult, counsel conducting internal investigations should carefullyanalyze who may be, or will become, ‘‘third parties,’’ and controldissemination of con�dential information.

4. Exceptions to the privilege

Texas Rule of Civil Evidence 503(d) lists �ve exceptions to theattorney-client privilege:

1. Furtherance of Crime or Fraud. If the services of the lawyer weresought or obtained to enable or aid anyone to commit or plan to com-mit what the client knew or reasonably should have known to be acrime or fraud;57

2. Claimants through Same Deceased Client. As to a communication rel-evant to an issue between parties who claim through the same deceasedclient . . . ;

3. Breach of Duty by a Lawyer or Client. As to a communication relevantto an issue of breach of duty by the lawyer to his client or by the clientto his lawyer;

4. Document Attested by a Lawyer. As to a communication relevant to anissue concerning an attested document to which the lawyer is an attest-ing witness;

5. Joint Clients. As to a communication relevant to a matter of commoninterest between or among two or more clients if the communicationwas made by any of them to a lawyer retained or consulted in com-mon, when o�ered in an action between or among any of the clients.

applies to third persons such as spouses, parents, business associates, and jointclients. Steven Goode, M. Michael Sharlott, and Cathleen C. Herasimchuk,Texas Rules of Evidence Handbook: Privileges, 30 Hous. L. Rev. 489, 527(1993) (citing advisory notes to proposed federal rules). The second exceptionconcerns third persons, such as interpreters, who facilitate communication be-tween the client and attorney. Id.

56See Securities & Exchange Comm’n v. OKC Corp., 474 F. Supp. 1031,1039 (N.D. Tex. 1979) (holding that the privilege did not apply when a personwho rightfully possessed information communicates the information to agovernment agency).

57With respect to the crime-fraud exception, a communication is notprivileged if the client knows or should have known that his contemplated actsare criminal or fraudulent. Thus, the exception turns on the client’s knowl-edge, not the attorney’s knowledge. The Texas Supreme Court has announcedtwo requirements of the crime-fraud exception: (1) the party seeking the evi-dence must establish a prima facie case of contemplated fraud, and (2) thecourt must �nd a relationship between the con�dential communication and theprima facie proof of fraud. Granada Corp. v. First Court of Appeals, 844S.W.2d 223, 227 (Tex. 1992); Cigna Corp. v. Spears, 838 S.W.2d 561, 568–69(Tex. App.—San Antonio 1992, no writ).



The applicability and e�ect of these exceptions di�ers in otherjurisdictions.

As investigations frequently concern fraud, some of which maybe criminal, particularly in light of Sarbanes-Oxley, counsel shouldkeep the crime of exception in mind. In particular, if the results ofthe investigation are not initially disclosed, but later come to light,counsel may have to defend the privilege against a plainti� assert-ing this exception. Also, Counsel should strive to avoid the e�ect ofthe ‘‘Joint Clients’’ exception by carefully documenting who is the‘‘client.’’ During the investigation, counsel should caution non-clients to prevent non-clients from believing that any attorney-clientrelationship exists.

5. The attorney-client privilege in derivative cases

Issues of privilege frequently become a focal point for the deriva-tive plainti�, and a quagmire for the corporation and the SLC.58

When analyzing these concepts, however, it is important to under-stand the distinction between the SLC and its counsel on one hand,and the corporation and its counsel on the other. Once again thisarea of SLC precedent provides a template for protection of theprivilege in a Sarbanes-Oxley audit committee investigation.

If properly organized and empowered, the SLC and their lawyershave a privilege among themselves. Counsel for the SLC mustdiscuss the investigation with the SLC, prepare reports to the SLC,etc. These types of communications will likely be protected fromdisclosure by the attorney client privilege. Privileges also may at-tach to corporate information the SLC obtains in the course of itsinvestigation. For example, the SLC may itself review highly sensi-tive and privileged information in the course of its work. It seems il-logical that review by the SLC of such material would waive anyprivilege.59

Communications between the corporation’s counsel and theSLC’s counsel about the derivative lawsuit itself may not beprivileged, especially prior to a decision by the SLC to terminate the

58See supra pp. 6–18 for a detailed discussion of privileges in internalcorporate investigations. This section builds upon that prior discussion by not-ing some special exceptions and issues.

59But see Garner v. Wol�nbarger, 430 F.2d 1093, 1103–1104 (5th Cir.1970).



lawsuit.60 It is not certain the joint defense privilege applies at all tocommunications before there is a pending lawsuit.61 Moreover, it isfar from certain that the board, management, and the corporation’scounsel on one hand and the SLC on the other hand have similarinterests prior to any decision by the SLC.62 As a result, pre-�ndingcommunications, particularly those other than the SLC with its owncounsel, should be treated as presumably discoverable.

Even if privileged, all communications should demonstrate inde-pendence from the corporation’s in�uence. Excessive contact be-tween the SLC’s counsel and corporation’s counsel, or excessiveclaims of privilege concerning those contacts, may suggest to theCourt an absence of independence. Thus, maintaining independenceand a degree of distance requires both strong SLC counsel and SLCmembers. This may create friction with the corporate entity, whichafter all is paying the bills. Nevertheless, keeping in mind the SLC’sburden to prove independence and diligence will frequently suggestthe proper course of action.

B. Attorney work-product

Under many circumstances, work product will attach to materialsprepared in the course of an internal investigation, particularly onein which there are allegations of fraud or self-dealing, and whichmay be a precursor to securities class actions or other shareholderlawsuits. Nevertheless, counsel should carefully consider this privi-lege as it relates to any material prepared.

Work product includes (1) material prepared or mental impres-sions developed in anticipation of litigation by or for a party or aparty’s representatives and (2) communications made in anticipa-tion of litigation or for trial between a party an the party’s represen-tatives, or among the party’s representatives.63 The doctrine protectstwo related, but di�erent, concepts.64 First, the doctrine protects theattorney’s thought process, which includes strategy decisions and

60See infra pp. 39–42.61Id.62Id.63TEX. R. CIV. P. 192.5; 8 CHARLES ALAN WRIGHT ET AL., FED-

ERAL PRACTICE & PROCEDURE, §2021–2028 (2d ed. 1994). The workproduct privilege is subject to the doctrine of ‘‘o�ensive use’’ waiver. Seeinfra pp. 38–39.

64Occidental Chem. Corp. v, Banales, 907 S.W.2d 488, 490 (Tex. 1995).



issue formulation, and notes and or writings evincing those mentalprocesses.65 Second, the privilege protects the mechanical compila-tion of information to the extent such compilation reveals the at-torney’s thought processes.66 The work product exemption is ofcontinuing duration.67 Moreover, the ‘‘subsequent to the occur-rence’’ and ‘‘particular pending suit’’ requirements have beeneliminated.

Texas and federal law distinguish between ‘‘opinion’’ work prod-uct and ‘‘ordinary’’ work product.68 Opinion work product includesmaterials that would reveal the attorney’s mental impressions,conclusions, opinions, or legal theories. Ordinary work product, onthe other hand, includes compilations of facts that do not includemental impressions. Opinion work product is rarely, if at all,discoverable in federal courts. A party may discover ordinary workproduct upon a showing of substantial need and undue hardship.

C. Attorney work product in derivative cases

Lawyers and consultants retained by those lawyers perform muchof the work in the typical SLC investigation. As this work by de�ni-tion concerns whether a corporation should pursue claims, the workgenerated by the SLC’s lawyers likely will be work product.69

Interviews of key personnel are generally a key aspect of anySLC investigation. These, like any communications with third-partywitnesses, typically do not fall within the privilege.70 The SLC’scounsel cannot immunize the witness statements by revealing them

65Id.66Id.67Owens Corning Fiberglas Corp. v. Caldwell, 818 S.W.2d 749, 751 (Tex.

1991); but see JUSTICE MICHOL O’CONNOR ET AL, O’CONNOR’STEXAS RULES: CIVIL TRIALS 2001, at 346 (2001) (concluding based onpre-Tex. R. Civ. P. 192.5 decisions, that ‘‘an investigation conducted beforethe suit was �led is protected only if it was conducted for the very suit inwhich the privilege is asserted’’). Federal cases on work product are notuniform, but the ‘‘sounder view’’ protects work product in subsequentlitigation. See 8 CHARLES ALAN WRIGHT ET AL., §2024.

68See generally TEX. R. CIV. P. 192.5(b); 8 CHARLES ALAN WRIGHTET AL., §2021–2028.

69TEX. R. CIV. P. 192.5.70Methodist Home v. Marshall, 830 S.W.2d 220, 224 (Tex. App.—Dallas

1992, no writ).



to the attorney.71 Likewise, an attorney cannot protect a witnessstatement under the attorney-client privilege by relaying it to theclient.72 And in any event, ‘‘witness statements’’ are not work prod-uct, even if made or prepared in anticipation of litigation or trial.73

Accordingly, counsel for the SLC and the corporation shouldexplain to the witness that their statements will not be protected,and will likely be disclosed to the plainti� and the court.

D. O�ensive use waiver

In 1993, the Texas Supreme Court established a new waivermechanism, i.e., a party may not use the attorney-client privilege asan o�ensive tool.75 Stated in other words, ‘‘ ‘[a] plainti� cannot useone hand to seek a�rmative relief in court and with the other loweran iron curtain of silence against otherwise pertinent and properquestions which may have a bearing upon his right to maintain hisaction.’’’76

The Davis court set out three requirements that trial courts mustfollow when determining whether a party has waived his privilege:

1. The party asserting the privilege must be seeking a�rmative relief.

2. The privileged information sought must be such that, if believed by thefact �nder, in all probability it would be outcome determinative of thecause of action asserted. Mere relevance is insu�cient; the con�dentialcommunication must go to the very heart of the a�rmative relief.

3. Disclosure of the con�dential communication must be the only meansby which the aggrieved party may obtain the evidence.77

71Id.72Id.73TEX. R. CIV. P. 192.3(h).75Republic Ins. Co. v. Davis, 856 S.W.2d 158, 163 (Tex. 1993).76Id. at 161 (quoting Ginsberg v. Fifth Court of Appeals, 686 S.W.2d 105,

108 (Tex. 1985)); see also Westheimer v. Tennant, 831 S.W.2d 880, 883–84(Tex. App.—Houston [14th Dist.] 1992, orig. proceeding [leave denied]) (ap-plying the o�ensive use waiver to attorney-client privilege); Parten v.Brigham, 785 S.W.2d 165 (Tex. App.—Fort Worth 1989, orig. proceeding)(same); DeWitt and Rearick, Inc. v. Ferguson, 699 S.W.2d 692 (Tex. App.—ElPaso 1985, orig. proceeding) (same); see also Owens-Corning Fiberglas Corp.v. Caldwell, 818 S.W.2d 749 (Tex. 1991) (applying the o�ensive use waiverto the work product privilege).

77Republic Ins. Co. v. Davis, 856 S.W.2d at 163.



If any one of these requirements is lacking, the trial court mustuphold the privilege.78

There is tension between the restrictions on discovery imposedby Delaware common law and TBCA 5.14 and ‘‘o�ensive use’’waiver of privileges. Frequently, an SLC’s decision will be signi�-cantly, and properly, based on a detailed legal analysis provided tothem by their attorneys. This communication is ultimatelyprivileged. However, as this communication frequently forms a keybasis for an SLC’s decision to dismiss a derivative suit, plainti�smay attempt to discover the context of this communication. Of-fensive use is at least one possible, and facially viable, mechanismto argue in favor of disclosure. Because of the explicit restrictionson discovery in Delaware corporate law and the TBCA, courts havea statutory and common law basis to prevent intrusion upon theSLC’s process by these privilege waiver doctrines. However, SLCcounsel should keep these arguments in mind and be prepared forchallenges of a similar nature.

E. Joint defense privilege

Under Texas law, the attorney-client privilege covers com-munications by the client (or the client’s representative) or theclient’s lawyer (or a representative of the lawyer) to a lawyer (orrepresentative of the lawyer) representing another party in a pend-ing action and concerning a matter of common interest in the pend-ing matter.79 This is known as the ‘‘joint defense’’ privilege. TexasCourts have found the privilege to apply when the client assertingthe privilege is:

(1) a party to the lawsuit;(2) a person who is about to be in the same lawsuit and is making the com-

munication in anticipation of litigation; or(3) a party with common defenses against a plainti�.80

One commentator has noted that the Texas rule derived from aproposed federal rule, about which the Supreme Court Advisory

78Id.; see also TransAmerica Natural Gas Corp. v. Flores, 870 S.W.2d 10(Tex. 1994); National Union Fire Ins. Co. v. Valdez, 863 S.W.2d 458 (Tex.1993).

79TEX. R. EVID. 503(b)(1).80Ryals v. Canales, 767 S.W.2d 226, 228 (Tex. App.—Dallas 1989, orig.

proceeding). Note, however, that the express language of TEX. R. EVID.503(b)(1) restricts the application of the privilege to a ‘‘pending matter.’’



Committee commented that the privilege ‘‘occurs in the ‘jointdefense’ or ‘pooled information’ situation where di�erent lawyersrepresent clients who have some interests in common . . . . Therule does not apply to situations where there is no common interestto be promoted by a joint consultation, and the parties meet on apurely adversary basis.’’81 Moreover, the privilege will not protectany communications between commonly represented clients if liti-gation subsequently ensues between them.82 The privilege does notinclude communications between two parties who were speakingwithout assistance of counsel.83

The SLC’s dual role presents di�culties as it relates to com-munications between the SLC’s counsel and corporate counsel. Onone hand, the SLC is acting with the authority of the board ofdirectors. It is, therefore, an arm of the corporation. As a result, theSLC’s counsel is in a sense also the corporation’s counsel. Thecorporation’s counsel represents the corporation—not the o�cersand directors—just like the SLC and its counsel. On the other hand,the SLC is independent from the board and management. As counselfor the corporation typically is not viewed as su�ciently indepen-dent to serve as counsel for the SLC, a court may not view counselfor the SLC and counsel for the corporation as having su�cientcommon interests to support the joint defense privilege. Thus,counsel for either the company or the SLC, must carefully considerthe following issues when evaluating the nature and extent of theircommunications:

(1) who is your client?

(2) what communications are privileged? and

(3) what privileges can be waived in the event of an ill-advised com-munication? As will be discussed later, the proper preservation of priv-ileges is important in limiting the discovery a derivative plainti�’s cantake to oppose or test the SLC’s ultimate recommendations.

At the outset of the investigation, the joint defense privilege pre-

Thus, the applicability of the privilege is uncertain to situations in which aputative derivative plainti� has made demand but not �led suit.

81WENDORF & SCHLUETER, TEXAS RULES OF EVIDENCE MAN-UAL, 601–602 (2d ed. 1988).

82Scrivner v. Hobson, 854 S.W.2d 148, 151 (Tex. App.—Houston [1st Dist.]1993, orig. proceeding).

83See generally, Steven Goode, M. Michael Sharlott, and Cathleen C.Herasimchuk, Texas Rules of Evidence Handbook: Privileges, 30 Hous. L.Rev. 489, 505 (1993).



sents, at best, a nominal degree of protection for corporate counsel—SLC counsel communications. Moreover, the question may be oneof practicality rather than legal standards. To the extent that thereare communications, and plainti� attempts to obtain discoveryconcerning those communications, a signi�cant level of such com-munications invariably may taint the process as a whole. Practical-ity also suggests that since the company is paying the SLC as legaladvisors, and its consultants, it has an interest in understanding theinvestigation and where it is going, any attempt to in�uence thecontents of the SLC’s report or its recommendations may be, atbest, dangerous policy.

The nature of company counsel/SLC counsel communicationsmay change once an SLC has determined that it is in the best inter-est of the corporation to dismiss the derivative litigation, especiallyif suit has already been �led. Then, the interests of the directors, of-�cers, and corporation’s counsel and those of the SLC may be moreclearly aligned, and the parties are ‘‘about to be in the same lawsuit’’and/or the communication is being made ‘‘in anticipation oflitigation.’’ Communications from that point forward may be lessre�ective of taint and more re�ective of a desire to implement whatthe SLC decided. Thus, throughout the entire process, questions ofprocedural and substantive fairness and independence must bedefensible in light of the purpose and empowerment of the SLC asan independent investigative body.

Section 4: Conducting the investigation

Conducting an investigation does not �t within well-establishedrules. Directors and counsel must be �exible, adapt, and exercisejudgment at every turn. Nevertheless, the following guidelines willimprove the likelihood that the investigator will satisfy the director’s�duciary duties:

D Before beginning the investigation, the corporation shouldprepare speci�c written directions or have counsel prepare anengagement letter setting forth his understanding of theassignment. The direction or engagement letter should statethat: (a) the purpose of the investigation is to obtain legaladvice; (b) the results of the investigation will be in a writtenreport to board of directors or other limited group of o�cersand will contain counsel’s legal advice about matter; and (c)



the purpose of investigation relates to some particular threat-ened litigation.84

D Counsel should be involved in the investigation from theoutset.85 Attorney involvement is essential to attorney-clientprivilege protection and an important consideration in theprotection of work product.

D Counsel should direct the investigation and assume primaryresponsibility for protecting attorney-client privilege and workproduct.86 When a large number of corporate employees maybe involved in an investigation, leadership becomes a criticalfactor in preserving such protections. Counsel should exten-sively document the investigation. Counsel’s notes of any em-ployee interview should indicate why the employee com-munication furthered the rendering of legal advice to thecorporation.

D Senior corporate o�cials should issue written instructions tothe employees advising them that: (a) they are to cooperatefully with counsel; (b) they are to keep con�dential thesubstance of any interview; and (c) what they disclose will beutilized by counsel for purpose of giving legal advice tocorporation.87

D Counsel should directly engage and supervise any non-lawyers,such as accountants, legal assistants, or investigators to be usedin the investigation. Such individuals should report directly,and only, to counsel.88

D Counsel should disclose con�dential information learned dur-

84Gergacz, supra, at App. A-1; see also Koniko� v. Prudential Ins. Co., 234F. 3d at 95 (The law �rm ‘‘was retained to . . . ‘ascertain all of the factsconcerning [the corporation’s] management and operation of the [allegedwrongful activity]’’’).

85Thomas R. Mulroy and W. Joseph Thesig, Jr., Con�dentiality Concernsin Internal Corporate Investigations, 25 Tort & Ins. L.J. 49, 61 (Fall 1989).

86Id. at 63.87Gergacz, supra note 43, at App. A-1. Note that corporate privileges can

attach to an interview with a former employee if that individual possesses in-formation needed to properly advise the corporation. In re Coordinated Pre-trial Proceedings, 658 F.2d 1355, 1361 n.7 (9th Cir. 1981), cert. denied subnom., California v. Standard Oil Co., 455 U.S. 990 (1982).

88United States v. Cote, 456 F.2d 142, 144–45 (8th Cir. 1972); InternationalTel. & Tel. Corp. v. United Tel. Co., 60 F.R.D. 177, 185 (M.D. Fla. 1973);



ing the investigation only to corporate o�cials who need thatinformation for decision-making purposes.89

D Counsel should try to obtain each piece of information fromthe highest-ranking corporate employee having access to thatinformation. This will maximize the protection of the attorney-client privilege if litigation arises under the laws of a state thatstill applies the ‘‘control group’’ test.90

D In the interest of full disclosure, counsel should inform eachemployee being interviewed that counsel represents the corpo-ration and that only the corporation, not the employee, canprevent disclosure of the interview.91

Special attention should be given to the scope of the investiga-tion, including any limits placed on that scope. Areas or issues thatare not reviewed may well impact the outcome of the investigationand render it ine�ectual. Thus, while cost and other factors are ofnecessity serious concerns, an investigation that does not provide anaccurate assessment may prove more costly that any costs saved byinappropriately limiting the investigation.

I. A good faith investigation of derivativeclaims

An SLC is charged with determining whether pursuing derivativelitigation regarding related party transactions would be in the bestinterest of the corporation. The SLC must make this determinationbased on a good faith and reasonable investigation addressing fac-tors the SLC deems appropriate under the circumstances. What this

United States v. Kovel, 296 F. 2d 918, 921 (2d Cir. 1961); see also Dabney v.Investment Corp. of Am., 82 F.R.D. 464, 465 (E.D. Pa. 1979) (privilege didnot attach to communications with a law student not under direct control andsupervision of counsel).

89Mulroy and Thesig, supra note 60, at 62.90Id. at 64.91Id. at 62–63; Gergacz, supra note 43, at 2–12; see also Model Rules of

Professional Conduct Rule 1.13, comment (advancing that ‘‘if the lawyer isconducting an inquiry into possible illegal activity, a warning might be es-sential to prevent unfairness to a corporate employee’’); W.T. Grant Co. v.Haines, 531 F.2d 671, 675–76 (2d Cir. 1976) (criticizing corporate counsel forconvincing an employee to submit to interrogation without mentioning thefact that the corporation had sued the employee).



means, therefore, is a uniquely case-by-case analysis. However, agood faith investigation, at a minimum, probably includes:

D detailed interviews of all the relevant persons;

D detailed review of documents and/or �nancial transactions atissue;

D review of the legal authority applicable to plainti�s’ claims;and

D application of the appropriate legal authority to the facts asinvestigated and determined by the SLC and the preparation ofa detailed report setting forth, at least in general terms, thereasons forming the basis for the SLC’s ultimate conclusion.

Absent these elements, it will be di�cult for an SLC to persuade acourt that its investigation has been thorough and in good faith. Anye�orts by the corporation to dictate the process, to restrict access tocertain personnel, or restrict access to documents or facts likely willtaint the process and render it ine�ective.

A key question is the amount of time the actual SLC membersmust spend participating in the investigation. Clearly, more is better.The SLC members should devote su�cient time to the process bothat the beginning, middle, and end stages to be able to: (a) testify ap-propriately about what they did and their knowledge of the subjectmatter; and (b) be able to support the conclusions reached as theirown and not those of counsel or advisors. In this regard, it isfrequently helpful for the SLC to hold periodic meetings and retainminutes of those meetings to provide a basis for the court toconclude that the SLC was su�ciently involved in the process tosupport a �nding of good faith. Nevertheless, courts frequently arerealistic about the need for SLC members—frequently high-levelbusiness executives in other corporations—to rely on its counselorsand advisors to conduct the bulk of the investigation and provideappropriate counsel.92

II. Related party transactions

A di�erent perspective on internal investigations occurs when aboard is presented with a ‘‘related-party’’ or ‘‘interested’’

92See, e.g., Katel v. Morgan Stanley Group, Inc., 1995 WL 376952 (Del.Ch. June 15, 1995) (‘‘I �nd nothing unreasonable about [the SLC’s ] relianceon counsel.’’)



transaction. Unlike typical corporate decisions, the conduct ofinterested parties standing on both sides of a transaction will beviewed under the more exacting standard of ‘‘entire fairness,’’ asopposed to the more deferential ‘‘business judgment,’’ standardusually applied to corporate decisions.93 Transactions involving acontrolling shareholder are viewed with increased scrutiny.94 Insid-ers, not the plainti�-stockholder, bear the burden of proof undersuch circumstances.95 It is only if the transaction has been approvedthrough a ‘‘well functioning committee of independent directors’’that the burden can be shifted back to the plainti�-shareholder.96

Even if such a committee approves the transaction, however, the‘‘entire fairness’’ standard remains applicable.97

Under such circumstances, the corporation bears the burden toprove that the investigation functioned in a manner ‘‘which indicatesthat the controlling shareholder did not dictate the terms of the trans-action and that the committee exercised real bargaining power at anarms length.’’98 The corporation should expect a detailed inquiryinto the formation of the committee, the resources at its command,the adequacy of the information at the committee’s disposal, andother variables. As a result, directors and counsel should considerapplying the principles discussed herein to these types of committeeproceedings.

III. SLC examination

An SLC must examine the merits of each claim, including allfactual and equitable considerations. Moreover, the SLC must focuson legal standards that would be applied to plainti�s’ claims becausethe application of these standards directly a�ects the corporation’slikelihood of success. This focus is critical, because an SLC canreach a conclusion that a potential claim exists, but still choose forlegitimate reasons not to bring the claim. It may also simply requestrefund of monies or other bene�ts provided to the ultimate target ofthe derivative lawsuit, rather than choosing litigation at all.

93Kahn v. Tremont Corp., 694 A.2d 422, 428, (Del. 1997).94Id.95Id.96Id.97Id.98Id. at 429.



After examining the likelihood of success, the SLC likely should:(1) examine the costs and bene�ts associated with pursuing theclaims raised; and (2) consider the bene�ts of available alternativesto litigation, including implementing internal corrective action.Costs of pursuing the litigation may include, but are not limited to:

D attorneys’ fees, expert and consulting fees;

D use of resources and personnel;

D e�ect on employee, investor, and/or business relationships;

D disruption of critical markets and/or services;

D damage to public image; and

D negative e�ect on share price.

The SLC should then weigh these costs against the potentialbene�ts of recovery to the corporation, including but not limited to:the amount of the recovery; improvement of business practices; andpossible e�ect on share price.After examining all these issues, the SLC can make a fully-informed, well reasoned decision on whether to allow the derivativeaction to proceed.

Focusing on the burden of proof in the context of an SLCproceeding is also important. Frequently, an SLC will be evaluatingrelated party transactions that are ultimately governed by the ‘‘entirefairness’’ standard set forth in Kahn v. Tremont Corp.99 Under Dela-ware law, a Section 144 transaction challenged by its stockholderwill be upheld if found to be ‘‘entirely fair’’ to the corporation.100

The burden of showing fairness generally rests with the defendant.101 In the context of an SLC investigation, however, the inquiry isdi�erent. There, the ultimate defendant may not have to ‘‘prove’’the ‘‘entire fairness’’ of the transaction to the SLC, because theSLC’s inquiry is not limited to the ultimate success of the litigationalone. The SLC is not evaluating the transaction in the same contextas would a court. It is not only acceptable, but appropriate, for theSLC to consider business issues when determining whether or not

99694 A.2d 422 (Del. 1997).100Weinberger v. UOP, Inc., 457 A.2d 701, 710 (Del. 1983).101Tremont Corp., 694 A.2d at 428. However, the burden of proof can be

shifted to the plainti� if the transaction is approved by a well-functioning andfully informed committee of independent directors. Id.



to bring a claim or allow the plainti� to proceed. Thus, the SLC may�nd that a corporation should not pursue a claim even if a courtmight �nd that some fact issues remain. As long as the investigationis thorough and the evaluation is in good faith, the SLC’s decisionlikely will prove determinative.

A. Practical considerations

1. Marking and structuring documents

The party asserting a privilege or exemption shoulders the burdenof proving protection.102 Thus, a corporation should be prepared toproduce extensive documentation establishing these protections. Bymarking protected documents, the corporation will enhance theprospects of preserving the privilege in later litigation.103

If a document contains material protected by attorney-client priv-ilege, that document should be marked as privileged andcon�dential.104 This simple procedure helps assure a court that thedocument was created with the privilege in mind. Furthermore, if

102In re Horowitz, 482 F.2d 72, 82 (2d. Cir.), cert. denied, 414 U.S. 867(1973).

103Larry D. Carlson, Attorney-Client Privilege, 57 Tex. B.J. 236, 239 at fn.6 (March 1994). Although the attorney-client privilege applies to legal com-munications with in-house counsel, courts tend to specially scrutinize privi-lege claims for in-house communications. Courts taking this approach oftennote that the privilege protects only the attorney-client communication, notfacts communicated which are otherwise discoverable. Special scrutiny of in-house communications, courts sometimes opine, prevents the corporationfrom making the o�ce of in-house counsel a privileged ‘‘sanctuary’’ for thefacts contained in business records. Research Inst. for Medicine and Chemis-try, Inc. v. Wisconsin Alumni Research Foundation, 114 F.R.D. 672, 676(W.D. Wis. 1987); United States v. Davis, 131 F.R.D. 391, 401 (S.D.N.Y.1990). Moreover, inside counsel often give business as well as legal advice.Thus, proving that an investigation was for the purpose of rendering legaladvice might be more di�cult if in-house counsel conducts the investigation.Thomas W. Hyland and Andrea E. Forman, The Attorney-Client Privilege inthe Corporate Setting Part II, Lawyers’ Liability Review, at 6 (Dec. 1991);but see Mission Nat’l Ins. Co. v. Lilly, 112 F.R.D. 160 (D. Minn. 1986) (�nd-ing that outside lawyers hired by an insurance company ‘‘as a matter of courseto conduct its claims adjustment investigations in a geographic area includingMinnesota for all claims exceeding $25,000,’’ did not a�ord privileged protec-tion to the investigation).

104John W. Gergacz, Attorney-Corporate Client Privilege, at 3–46 (2d. ed.1990); Thomas R. Mulroy, Jr. and W. Joseph Thesig, Jr., Trial Techniques:



the document gives legal advice, the structure of the documentshould establish that con�dential communications comprise a largeportion of the document’s content. The privilege will protect legaladvice only if the disclosure of that advice would directly orindirectly reveal client con�dences.105 Thus, counsel should inte-grate the advice given with a discussion of con�dential facts re-vealed by the client.106 Counsel’s advice should be dependent uponand inseparable from the con�dential facts, leaving no doubt thatrevelation of the document would also reveal client con�dences.

Similar considerations apply to the creation of work productdocuments. Some authors suggest labeling each work product docu-ment with a statement that the document was prepared in anticipa-tion of litigation.107 At the time a document is created, however, it isoften di�cult to delineate between anticipation of litigation andother purposes. By marking certain documents as prepared inanticipation of litigation, a corporation could risk creating anadverse presumption for unlabeled documents, which might eventu-ally warrant protection. Nevertheless, indiscriminately markingdocuments as work product will almost certainly diminish the valuea court might otherwise place on the label. Thus, corporationsshould carefully weigh the merits of marking work product docu-ments against the possible risk.

Whether marked or not, work product documents can be struc-tured in awareness of the fact that courts protect ‘‘opinion’’ workproduct more vigorously than ‘‘ordinary’’ work product.108 Counselmay, as appropriate, interject legal opinions, theories, and strategiesinto notes, witness interviews, and documents communicating legaladvice to corporate management.109

Protecting Client Con�dences When the Client is a Corporation, 25 Tort &Ins. L.J. 476, 486 (Winter 1990).

105In re LTV Securities Litigation, 89 F.R.D. 595, 603–04 (N.D. Tex. 1981);In re Grand Jury 90–1, 758 F. Supp. 1411, 1413 (D. Colo. 1991).

106Gergacz, supra note 43, at 3–46.107Mulroy and Thesig, supra, at 486.108Hisaw v. Unisys Corp., 134 F.R.D. 151, 152–53 (W.D. La. 1991); Leede

Oil & Gas, Inc. v. McCorkle, 789 S.W.2d 686, 687 (Tex. App.—Houston [1stDist.] 1990, no writ).

109Mulroy and Thesig, supra note 43, at 486.



2. Controlling the dissemination of protectedinformation

When corporate o�cials discuss con�dential matters at a meetingwith counsel, attendance at the meeting should be strictly limited.110

Counsel should document the nature of the meeting, the corporatepersonnel in attendance, and the reason for the presence of eachperson. Attendance should be limited to those personnel whose jobduties require access to the particular privileged information to bediscussed.111 The corporation should allow the presence of a non-employee only if: (1) the corporation hired that person as an agentto perform a task; (2) the corporation exercises control over the per-formance of the person’s task; and (3) the person’s participation iscrucial to the process of rendering legal advice.112

Dissemination control is less signi�cant with documents implicat-ing only work product. This follows from the fact that work productprotection can be destroyed or waived only by an action thatsubstantially increases the possibility that an adversary in litigationwill gain access to the work product documents.113 Nevertheless,widespread dissemination increases the chances of work product in-formation falling into the wrong hands. Moreover, failure to followcareful document control procedures might result in inadvertentdisclosure to an adversary. Where a failure to take reasonableprecautions to protect work product results in such disclosure, courts

110David Simon, The Attorney-Client Privilege as Applied to Corporations,65 Yale L.J. 952, 985 (1956).

111See Gergacz, supra note 43, 3–52–3-53 (asserting that circulation to em-ployees not needing the information can destroy con�dentiality, thus prevent-ing the creation of the privilege); Cuno, Inc. v. Pall Corp., 121 F.R.D. 198,203 (E.D.N.Y. 1988) (indicating that disclosure to employees not needing theinformation can waive the privilege).

112Compare Liggett Group, Inc. v. Brown & Williamson Tobacco Corp.,116 F.R.D. 205, 210–11 (M.D.N.C. 1986) (�nding that presence of third partywho was not an agent destroyed the privilege) with United States v. Kovel, 296F.2d 918, 922 (2d. Cir. 1961) (�nding that an accountant’s assistance inattorney-client communications regarding a complicated tax matter did notdestroy the privilege).

113United States v. Gulf Oil Corp., 760 F.2d 292, 295 (Temp. Emer. Ct.App. 1985); In re Grand Jury Subpoenas, 561 F. Supp. 1247, 1257 (E.D.N.Y.1982).



will �nd waiver.114 Like privileged documents, work product docu-ments should be kept in separate legal �les. Storing work productdocuments in this manner not only minimizes the risk of waiver, butalso helps establish that the documents were created in anticipationof litigation.

B. Discovery in the SLC context

The SLC process presents unique discovery issues—both Zapataand TBCA 5.14 limit the discovery plainti�s may obtain in order tocontest any recommendation issued by the SLC. Generally, thatdiscovery is limited to issues concerning the independence of theSLC members and the process followed by the SLC to reach itsultimate conclusion. At most, this litigation means discovery of thefollowing:

1. the SLC’s Report;

2. depositions of the SLC Members;

3. documents relating to the creation and appointment of the SLC;

4. Communications between the SLC and the individual defendants; and

5. Witness Interviews.74

Plainti�s typically cannot depose individuals the SLC interviewedin the course of its work, obtain document discovery of all the itemsreviewed by the SLC, or depose the SLC’s counsel. And for goodreason—the SLC process is intended to be less expensive than liti-gation on the ultimate merits of the lawsuit.

As one might expect, there is a tension between sharing with thederivative complainant enough information to support a �nding thatthe investigation was conducted in good faith and limiting disclosureabout internal corporate workings of the corporation. For example,production of some of the documents reviewed may be advisable.Plainly, the more information that e�ectively can be disclosedfrequently provides more support for the diligence of the investiga-

114Lois Sportswear, U.S.A., Inc. v. Levi Strauss & Co., 104 F.R.D. 103, 105(S.D.N.Y. 1985).

74Carlton Investments v. TLC Beatrice Int’l Holdings, Inc., 1997 WL305829, *2 (Del. Ch. May 30, 1997); Kaplan v. Wyatt, 1984 WL 8274, at*2–4 (Del. Ch. Jan. 18, 1984); see also TEX. BUS. CORP. ACT Art. 5.14(D)(limiting discovery to ‘‘facts relating to whether [the SLC] is independent anddisinterested, the good faith of the inquiry and review by [the SLC], and thereasonableness of the procedures followed by [the SLC] in conducting itsreview’’).



tion rather than less. However, the more information that isdisclosed generally also permits the plainti� more areas of inquiry.Ultimately, both Delaware law and TBCA 5.14 provide guidance onexactly what discovery is permitted, and assist SLC counsel indetermining what must be produced, as well as what should beproduced from a tactical perspective.

C. Voluntary disclosure to the government

Internal investigations may produce information that the corpora-tion may wish to voluntarily disclose to a government agency;before doing so, a corporation should consider the e�ect of suchdisclosure on the attorney-client privilege and work product. Mostcourts reaching the issue have held that such disclosure waives theattorney-client privilege.115 A few courts have held that the waiver islimited to litigation against that government agency.116 A few othershave held that the waiver is limited to litigation against the agencyonly if the disclosing party expressly reserves the privilege;otherwise, the waiver is complete.117 Under any of these holdings,waiver occurs if disclosure substantially increases the chance that aparty adverse to the disclosing party will obtain the documents.118 Inlight of the applicable authority, therefore, a corporation shouldgenerally assume that voluntary disclosure to the governmentwaives attorney-client privilege.

Even obtaining a con�dentiality agreement from a governmentagency may not provide protection. Indeed, some jurisdictions haverejected the ‘‘government investigation exception,’’ even whenconfronted with a con�dentiality agreement between the corpora-

115In re Columbia/HCA Healthcare Corp. Billing Practices Litigation, 293F.3d 289, 307 (6th Cir. 2002); Westinghouse Elec. Corp. v. Republic of Philip-pines, 951 F.2d 1414, 1423–31 (3d. Cir. 1991); In re Subpoenas Duces Tecum,738 F.2d 1367, 1369–75 (D.C. Cir. 1984); United States v. Jones, 696 F.2d1069, 1072 (4th Cir. 1982).

116Diversi�ed Industries, Inc. v. Meredith, 572 F.2d 596, 611 (8th Cir.1977).

117Teachers Ins. and Annuity Ass’n v. Shamrock Broadcasting Co., 521 F.Supp. 638, 644–45. (S.D.N.Y. 1981).

118In re Subpoenas Duces Tecum, 738 F.2d at 1371.



tion and the government.119 Thus, it is not a settled question whethera disclosure of privileged information to the government, in thecourse of an investigation and with a con�dentiality agreement,waives the privilege in its entirety.

IV. The SLC’s report

The content of the SLC’s report follows no precise formula. Theamount of detail, will vary depending on the dynamics of the partic-ular investigation and proceeding. At a minimum, it should be ac-companied by a�davits from the SLC members adopting the reportand its contents. It also should contain su�cient detail to permit theCourt to rule on: (1) the independence of the committee; (2) the dil-igence of the investigation and the procedures employed; and (3)the rational basis of the results of that investigation. Deciding whatelse the report contains is a matter of judgment based on what theSLC and its counsel believe the Court needs to evaluate the SLC’sdecision on the basis of the factors relevant to that particular dispute.As those needs will vary by judge and by suit, there are no hard andfast rules.

Conclusion

Corporate investigations of all types have become a necessarypart of conducting business. Without them, directors and o�cerswill be exposed, many times personally, to an array of claims. Al-legations of wrongdoing that come to the corporation’s attentionshould be handled carefully, and with the assistance of counsel.Blind reliance on the assurances of insiders and their advisorsclearly appears insu�cient. As a result, directors, particularly auditcommittee directors in public companies, will likely spend consid-erably more time ful�lling their duties than they have in the past,and may seek and are now empowered to seek independent counselto help them. The corporation’s in-house and outside counsel shouldanticipate such a trend as an evolving part of corporate governancein the post-Enron, post-WorldCom world.

119In re Columbia/HCA Healthcare Corp. Billing Practices Litigation, 293F.3d at 307; Westinghouse Elec. Corp., 951 F.2d at 1427–27; but see In reSteinhardt Partners, L.P., 9 F.3d 230 (2d Cir. 1993) (holding that governmentinvestigation exception in conjunction with a con�dentiality agreement with agovernment agency forecloses waiver).



conducting corporate investigations under the increased scrutiny

Documents