Can Internal Investigations be Kept From Shareholders?

Addressing the question that titles this article, the author first considers the case of Mark Hurd, former chairman, president and CEO of Hewlett-Packard Company, as a cautionary tale. Internal investigations of sensitive issues in the corporation typically but not always fall under the attorney-client privilege or the work-product doctrine. An exception, discussed in the article, is related to corporate governance issues and the so-called “fiduciary exception” in the context of a shareholders’ suit.

Hurd, as head of Hewlett-Packard, hired a woman to host HP executive events, after seeing her on tv. According to the woman’s attorney, he then pressured her for sex over a period of two years, and along the way disclosed some inside financial information. The HP board retained Covington & Burling to do an investigation, which determined that no sexual harassment had occurred, but that Hurd had violated HP’s “Standards of Business Conduct.” As part of an agreement the board then negotiated with Hurd, he was granted a severance package reportedly worth $35 million. This prompted a wave of shareholder “books and records” demands and shareholder litigation.

One case, originally filed in the Delaware Court of Chancery, was appealed to the Delaware Supreme Court. It determined that accessing the privileged report was not “essential” to the plaintiff’s case, but did not rule directly on the central issue of privilege.

This decision, the author says, should give companies “comfort – but only limited comfort – that internal investigations will remain confidential.”