Red Flags Everywhere! – Ten Risks for Directors – Week 8

Each week for the next 10 weeks, we will publish an installment of our Red Flags Everywhere! series, highlighting key risk areas that public companies and their board of directors should keep top of mind.

This series will serve as a lead up to MoFo’s upcoming Red Flags and Red Wine Tabletop program taking place in our Palo Alto office on May 7. Members of our Securities Litigation, Employment and Labor, and Capital Markets Groups will guide attendees through a ripped-from-the-headlines fact pattern designed to spark interactive discussion and practical analysis that will be valuable to every board advisor.

This week, we focus on attorney-client privilege. Privilege is powerful, but not invincible, and can be lost if legal advice is shared too broadly or mixed with business communications.

If you are interested in learning more about MoFo’s Red Flags Everywhere tabletop event, please reach out to Deborah Argueta. See all the Red Flags client alerts.

Boardroom Attorney-Client Privilege Requires Deliberate Boundaries

Boards benefit from candid legal advice from counsel. Such advice is generally protected by the attorney-client privilege. But it would be a mistake to assume that every communication that includes a lawyer is automatically and irrevocably privileged. Privilege only attaches to confidential legal advice, not business advice. And privilege can be waived, both intentionally and unintentionally. For example, privilege may be inadvertently waived when the advice is shared with third parties.

Preserving privilege in the boardroom requires discipline around the purpose of the advice, the parties who are privy to the advice, and how the advice is recorded and stored.

Not Everything Counsel Touches Is Privileged—Separate Legal Advice from Business Advice

Lawyers often advise boards on matters that have legal, commercial, strategic, and investor-relations dimensions. That does not mean every related communication is privileged. For starters, legal discussions with non-lawyers—including AI bots—are not privileged.[1] Even when the discussions are with counsel, there may be questions about whether the advice is actually legal advice, rather than merely business advice. This is particularly a concern for in-house counsel who may hold non-legal responsibilities within the organization. When privilege is challenged, courts generally ask whether the predominant purpose of the communication was to render or solicit legal advice, rather than business advice.

The practical lesson is straightforward: if the board is seeking legal advice, say so and structure the communication accordingly. If the matter is particularly sensitive, consider involving outside counsel who are less vulnerable to claims that the advice should be construed as business advice. Where feasible, legal analysis should be separate from business recommendations. In board decks and minutes, consider providing distinct legal sections, or context that makes it clear that legal advice is being provided. In emails, avoid mixing a legal question with a broad commercial brainstorming chain. And when counsel is being asked to provide primarily commercial input, do not assume the communication will be privileged simply because a lawyer sent it.

The Audience Matters—Privilege Can Be Lost When Legal Advice Is Shared with Third Parties

Privilege depends on confidentiality. Once legal advice is shared with people outside the privilege circle, waiver risk rises quickly. As we discussed in last week’s alert, board communications that are sent to an email server of a different company risk privilege waiver. Additionally, the people who are present during privileged board discussions may also lead to inadvertent privilege waiver. 

The Delaware decision in Ryan v. Gifford serves as a classic boardroom warning about the importance of assessing who should be in the room when privileged advice is shared.[2] There, a stockholder brought a derivative complaint against the board of directors of Maxim Integrated Products, Inc., alleging the directors breached their fiduciary duties by approving or accepting backdated stock options. In response, Maxim’s board of directors formed a special committee which retained outside counsel to conduct an independent investigation into the allegations. At the conclusion of the investigation, the special committee presented its detailed oral report at a meeting attended by the full board of directors, including the directors who were themselves defendants along with their personal counsel. The Delaware Court of Chancery held that this board meeting waived attorney-client privilege over all communications relating to the investigation. The court reasoned that by sharing the privileged advice in an adversarial setting attended by the director defendants and their counsel, privilege was waived.

The case shows that an assessment of who is within the privilege circle is not always straightforward, and should be regularly assessed based on the advice being given. This problem is not limited to litigation. A board meeting can easily include investment bankers, public relations consultants, auditors, management participants, or individual directors’ separate counsel. Some third parties may be necessary to facilitate legal advice; others may not be. Boards should therefore think in advance about who needs to be in the room for a privileged discussion and who does not. A sensible practice is to separate ordinary business sessions from legal-advice sessions and to record attendance carefully.

Board Designees and “Dual-Hat” Directors Create Special Privilege Risk

Modern boards frequently include “dual-hat” directors—people who serve as directors while also holding roles with an investor, lender, or other constituency. Those overlapping roles create recurring privilege problems because the same person may receive information in more than one capacity. Argos Holdings Inc. v. Wilmington Tr. Nat’l Ass’n[3] illustrates this risk. In that case, two law firms represented PetSmart, Inc. and its parent Argos Holdings, Inc. in connection with an acquisition. The Argos board included three directors who were appointed by an investor, private equity firm BC Partners, Inc. Following the transaction, litigation arose wherein a party sought to obtain communications that the two law firms sent to the BC Partners board designees. Argos resisted, arguing that the communications were protected by attorney-client privilege. The court held that many of the communications sent to the BC Partners board designees were not privileged. The court reviewed each communication to determine whether the communication was sent to the BC Partners affiliates in their capacity as Argos board members or in their capacity as BC Partners representatives. Generally, where the communication was sent to all Argos board members, the court determined the communications were privileged because the BC Partners board designees were likely receiving the communication in their capacity as Argos board members. However, where the law firms were communicating with the BC Partners board designees alone, and without the entire Argos board, the court concluded the communication was likely made in the designees’ capacity as BC Partners representatives, and therefore any privilege was waived.

Delaware law adds another layer. In Hyde Park Venture Partners Fund III, L.P. v. FairXchange, LLC,[4] the Delaware Court of Chancery held that an investment fund with a former board designee could obtain privileged documents created during the designee’s tenure. The case involved an investment fund that invested in a company that was later acquired in a merger. The fund’s designated director disagreed with a merger proposal, eventually leading to his removal from the board. After the merger closed, the investment fund sued to challenge the transaction. During litigation, the fund sought to obtain privileged materials created during the designee director’s tenure. The court ruled that the fund was entitled to the privileged documents. The court reasoned that the designee director was a joint client along with the other directors and the fund was in the “circle of confidentiality.” Neither the company nor the other directors took the necessary steps to exclude the designee director, such as by creating a special committee excluding the director or otherwise placing the director on notice of his adversity to the company’s interests. As a result, the fund could obtain materials created up until the designee was removed from the board. One year later, however, the Court of Chancery clarified in Icahn Partners LP v. deSouza,[5] that a minority stockholder that merely nominates a successful board candidate is not automatically entitled to privileged company information.

For boards, the practical implications are significant. When a board includes investor designees, the board and counsel should regularly reassess privilege implications. Distribution lists should be built deliberately, not by habit. If a sponsor-affiliated or otherwise conflicted director is involved, the board should first understand the role of the director. Is the director receiving information as a director, as an investor representative, or in both capacities? Next, the board should consider whether a separate channel, separate counsel, or a special committee is warranted. The board should carefully document its decisions in this process.

Minutes Should Show Oversight Without Reproducing Counsel’s Analysis

Board minutes also require special attention to privileged material. Board minutes and formal materials that show attention, questioning, and actions are critical to demonstrating director oversight. But tread carefully when recording legal advice from board advisors. The best practice is for minutes to record that legal advice was received on a particular topic, discussed, and that questions were asked, but refrain from recording the substance of the advice. Minutes should also reflect who was present during the legal advice and ensure that all present are within the privilege circle. It is best not to record board or committee meetings. Rather, allow the minutes to be the official record of the meeting.

Key Takeaways

1.  Decide when the board is seeking legal advice—and say so. Use agendas, decks, and email subject lines to distinguish legal advice from ordinary business discussions. Where feasible, separate legal memoranda from business materials and ask counsel to provide discrete legal analysis.
2. Control the room and the distribution list. Before privileged discussions, confirm who needs to be present to receive or facilitate legal advice. Be especially careful with bankers, consultants, investor representatives, and directors’ separate counsel. Where appropriate, hold narrower legal sessions.
3. Manage dual-hat and potentially adverse directors early. Clarify representation, adopt or revisit confidentiality provisions, consider special committees and separate counsel when interests diverge, and put affected directors on notice once sufficient adversity exists.
4. Build a disciplined formal record. Use minutes and board materials to show that the board was informed, asked questions, and directed follow-up actions, but avoid turning the minutes into a transcript of counsel’s detailed advice. Keep the record accurate, balanced, and high level.

Bottom line: Attorney-client privilege is a critical governance tool for directors, but it is a fragile one. Boards should not assume that privilege exists because a lawyer is present or because a document bears a label. Instead, boards should preserve privilege through a deliberate process—clear purpose, controlled audiences, careful handling of dual-hat directors, and disciplined minutes.

The prior Red Flags alerts are available here:

• Week 1: Director Oversight of AI Requires Strong Processes and Good-Faith Engagement
• Week 2: Board Engagement with Political and Social Issues Should Be Tied to Stockholder Value
• Week 3: Board Refreshment and Director Risk: Navigating Investor Demands and Delaware Constraints
• Week 4: Board Oversight of the CEO Should Be Active and Independent
• Week 5: Rule 10b5-1 Plans and Insider Trading Policies Should Be Real, Current, and Enforced
• Week 6: Board Oversight of Internal Investigations: Serious Allegations Merit Serious Oversight
• Week 7: Board Communications Can Become Evidence: Treat Email, Text, and Chat Hygiene as a Governance Issue

[1] See United States v. Heppner, No. 1:25-CR-00503-JSR (S.D.N.Y. Feb. 10, 2026) (granting motion to access documents that a CEO created using the AI tool Claude before he was charged with securities fraud).

[2] No. 2213-CC, 2008 WL 43699 (Del. Ch. Jan. 2, 2008).

[3] No. 18-CV-5773 (DLC), 2019 WL 1397150 (S.D.N.Y. Mar. 28, 2019).

[4] 292 A.3d 178 (Del. Ch. 2023).

[5] No. 2023-1045-PAF, 2024 WL 180952 (Del. Ch. Jan. 16, 2024).