February 13, 2024

Activism: Director Can’t Share Confidential Information with Activist Hedge Fund

In a recent letter ruling in Icahn Partners LP  v. deSouza, (Del. Ch.; 1/24), the Chancery Court held that an activist nominee was not permitted to share privileged and confidential information received in his capacity as a director with the hedge fund that nominated him. The case arose out of Carl Icahn’s proxy contest with Illumina, which resulted in the election of an Icahn-designated nominee to the Illumina’s board.  That director shared confidential information received in his capacity as a director with an Icahn fund, and that information subsequently formed the basis for allegations contained in a complaint filed against the company.

The company moved to strike the allegations that were based on this information, and Vice Chancellor Fioravanti granted that motion. Although he noted that in some situations, Delaware courts have permitted directors to share confidential information with the entities that nominated them, he held that under the facts and circumstances of the present case, such information sharing was impermissible. This excerpt from Sullivan & Cromwell’s memo on the decision explains the Vice Chancellor’s reasoning:

The court noted that it “has not developed a bright-line rule” regarding a director’s ability to share company information with a stockholder that designated them, but that a line of Delaware cases supported the principle that directors may share a company’s confidential or privileged information with their designating stockholder (without destroying privilege) in “certain limited situations,” such as when the director (i) is designated to the board by the stockholder pursuant to a contractual right or as a result of the stockholder’s exercise of voting power or (ii) serves as a controller or fiduciary of the stockholder such that the director’s brain is unable to be divided between serving as a director of the company and serving as a controller or fiduciary of the stockholder seeking the information. Neither of these circumstances were present in this case.

Moreover, given the fact that the Icahn Director expressly agreed to abide by Illumina’s code of conduct, which prohibited the sharing of confidential information with third parties, the court found that it was reasonable for Illumina to expect that the Icahn Director would not share the information it provided him with the Icahn funds despite his known association with them. As a result, the court held that the Icahn funds had not established that they were within the “circle of confidentiality” that would grant them the right to receive the same confidential and privileged information the Icahn Director received.

The memo observes that because of the uncertainties in this area, companies facing stockholder nominations should review their corporate policies and D&O questionnaires, as well as any disclaimers contained in board materials to ensure they include appropriate confidentiality restrictions on directors. It also recommends that companies thinking about a settlement or other agreement that provides a stockholder with a designation right negotiate appropriate limitations on the designated director’s right to receive or share information.

John Jenkins