Circle of confidentiality: Delaware Court of Chancery clarifies conditions for information sharing between directors and nominating shareholders

Earlier this year, the Delaware Court of Chancery clarified when information sharing between the directors of a Delaware corporation and their nominating shareholders is permitted under Delaware law. In Icahn v. Illumina¹, the Court held that an employee of an activist shareholder who was nominated to the board of a public corporation could not share confidential and privileged board information with the shareholders who nominated him.

What you need to know

• Directors of Delaware corporations may share the corporation’s confidential information with a nominating shareholder when (1) a shareholder has the right to designate a director either through a contract (such as a shareholders’ agreement) or by voting power; or (2) the director also serves as fiduciary or controller of the shareholder. In these circumstances, the nominating shareholder will likely be considered within the corporation’s “circle of confidentiality”.
• Absent these circumstances, nominee directors are generally unable to share confidential information with affiliated and nominating shareholders under Delaware law.
• Private equity funds and other investors who nominate directors to the boards of target companies should be aware of restrictions on information sharing. To ensure information sharing is permitted, investors should obtain contractual rights to appoint a director or else ensure director nominees are controllers or fiduciaries of the investor entity. 
• Investors and director nominees should review the agreements, policies and codes of conduct that bind directors to be aware of restrictions on information sharing and, where possible, seek clear contractual acknowledgments of director nominees’ right to share information with nominating shareholders.

Background

The case concerned the admissibility of information derived from confidential and privileged board communications delivered by a director of Illumina, Inc. (Illumina), who was employed and nominated by an activist shareholder. The Court of Chancery rejected the activist shareholder’s argument that the director could share the corporation’s confidential and privileged information with the nominating shareholder solely because of the nominating and employment relationships they shared.

Icahn Partners L.P. and other affiliated funds (the Activist) were activist shareholders that collectively owned less than 2% of Illumina. The Activist nominated three directors for seats on Illumina’s board. One of these nominees, an employee of another Activist-controlled entity, was elected by shareholders to the board (the Activist Director). The Activist Director proceeded to share confidential and privileged Illumina information with the Activist, which the Activist then used in a complaint filed against Illumina.

In granting Illumina’s motion to strike paragraphs of the complaint derived from Illumina’s confidential and privileged information, the Court of Chancery found the Activist Director’s sharing of information was impermissible because it did not meet either of the bases established under prior case law allowing information sharing with a nominating shareholder. First, the Activist did not have a contractual right to nominate directors, nor did the Activist have sufficient voting power to elect the Activist Director. Second, the Activist Director, though an employee of the Activist, was not a controller or fiduciary of the Activist. Although the Court of Chancery acknowledged there could be other bases establishing a director’s right to share, such as fiduciary obligations, these circumstances did not exist between the Activist Director and Illumina. Finally, the Court of Chancery gave significant weight to the fact that the Activist Director agreed to be bound to the corporation’s code of conduct, which prohibited the sharing of confidential information with third parties, implicitly including the Activist.