Eric Gilmore v. Turvo, Inc. ( 2019 )

COURT OF CHANCERY
OF THE
STATE OF DELAWARE
417 S. State Street
JOSEPH R. SLIGHTS III Dover, Delaware 19901
VICE CHANCELLOR Telephone: (302) 739-4397
Facsimile: (302) 739-6179
Date Submitted: August 13, 2019
Date Decided: August 19, 2019
Philip Trainer, Jr., Esquire Brock E. Czeschin, Esquire
Marie M. Degnan, Esquire Susan M. Hannigan, Esquire
Aaron P. Sayers, Esquire John M. O’Toole, Esquire
Ashby & Geddes Tyre L. Tindall, Esquire
500 Delaware Avenue, 8th Floor Richards, Layton & Finger, P.A.
Wilmington, DE 19801 920 North King Street
Wilmington, DE 19801
Re: Eric Gilmore v. Turvo, Inc.
C.A. No. 2019-0472-JRS
Dear Counsel:
This letter opinion resolves Plaintiff’s Motion to Compel in which Plaintiff
seeks to compel Defendant, Turvo, Inc. (“Defendant” or “Turvo”), to produce
attorney-client privileged communications between Latham & Watkins, LLP
(“Latham”) and Turvo’s Preferred Directors,1 officers or employees that occurred
any time prior to a May 21, 2019 meeting where the Turvo board of directors
1
The Preferred Directors are Ibrahim Ajami, Wesley Chan and Steven Sarracino.
Eric Gilmore v. Turvo, Inc.
C.A. No. 2019-0472-JRS
August 19, 2019
Page 2
(the “Board”) purported to remove Plaintiff as Turvo’s CEO.2 For the reasons stated
below, the motion is denied.
I. BACKGROUND
Plaintiff, Eric Gilmore, is the co-founder and majority shareholder of Turvo
and has served as Chief Executive Officer of the company since its inception.3
During the relevant time period, Turvo’s Board consisted of four members—
Gilmore, Ajami, Chan and Sarracino.4
In May 2019, during a review of expenses charged to company credit cards,
Turvo’s Chief Financial Officer discovered that Mr. Gilmore had used his card to
expense at least $125,000 in entertainment charges, including (allegedly) $76,120
2
Pl.’s Mot. to Compel (“POB”) (D.I. 38). I granted the remainder of this motion in a bench
ruling on August 13, 2019, ordering the fact depositions of certain Latham attorneys
(regarding non-privileged information) and the production of non-privileged documents
responsive to Plaintiff’s discovery requests in the custody of Latham.
3
Id. ¶ 1. I draw the facts from the submissions relating to the Motion to Compel.
I acknowledge that Plaintiff disputes the allegations of wrongdoing that have been asserted
against him and that the resolution of that dispute, if relevant, awaits another day.
4
Def. Turvo, Inc.’s Opp’n to Pl.’s Mot. to Compel (“DAB”) (D.I. 47) ¶ 4.
Eric Gilmore v. Turvo, Inc.
C.A. No. 2019-0472-JRS
August 19, 2019
Page 3
paid to adult entertainment venues.5 The CFO alerted Chan to the charges, who then
notified Ajami and Sarracino.6
Seeking advice on how to proceed in light of the alleged misconduct of one
of their fellow Board members, the Preferred Directors turned to Latham instead of
the Board’s long-time counsel, Gunderson Dettmer Stough Villeneuve Franklin &
Hachigan, LLP.7 Latham had previously served as counsel for Activant, a Turvo
preferred stockholder, and had never represented Turvo or the Board.8 In the
following weeks, with Latham’s guidance, the Preferred Directors reviewed the
information relating to Mr. Gilmore’s alleged misconduct, assessed the impact the
misconduct had or would have on Turvo’s business and considered how to respond.9
On May 21, 2019, the Preferred Directors, Mr. Gilmore, counsel for Mubadala
Ventures (a preferred stockholder) and four Latham attorneys attended a meeting at
5
Id. ¶ 5.
6
Id. ¶ 6.
7
Id.
8
Id.
9
Id. ¶ 7.
Eric Gilmore v. Turvo, Inc.
C.A. No. 2019-0472-JRS
August 19, 2019
Page 4
Ajami’s office in San Francisco.10 After explaining that the purpose of the meeting
was to address Mr. Gilmore’s alleged misconduct, it is alleged that Sarracino asked
Mr. Gilmore to recuse himself from the meeting.11 In Mr. Gilmore’s absence, the
Preferred Directors removed Mr. Gilmore as CEO and adopted a resolution retaining
Latham as counsel for the Board “effective as of May 10, 2019.”12 According to
Defendant, the resolution’s retroactive language was intended to allow Turvo to pay
the legal fees incurred by the Preferred Directors prior to the May 21 meeting.
Mr. Gilmore contends that, as a member of the Board during Latham’s
engagement by other members of the Board, he is entitled to access Latham’s
privileged communications with the Preferred Directors and any Turvo officers or
employees.13 While he acknowledges the Board did not formally engage Latham
10
Id. ¶ 9. I make no determination regarding the validity of this meeting, nor do I draw
any conclusions about the facts in dispute relating to this meeting.
11
Id. ¶ 10.
12
Id.; DAB, Ex. 1 at TURVO-00002112.
13
POB ¶ 1.
Eric Gilmore v. Turvo, Inc.
C.A. No. 2019-0472-JRS
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prior to the May 21 meeting, Mr. Gilmore asserts that Latham functionally served as
counsel to the Board by advising the Preferred Directors.
In support of his position, Mr. Gilmore points out that the plain language of
the May 21 resolution makes clear that Latham’s service to the Board began on
May 10 and gives no indication that the purpose of backdating the resolution was to
clarify billing protocols as Defendant now suggests.14 He maintains that
contemporaneous email communications as well as deposition testimony indicate
that the Preferred Directors believed Latham was acting as counsel to the Board.
Specifically, Mr. Gilmore cites an email dated May 22, 2019, in which Sarracino
told a Turvo investor, “The board worked around the clock for the last two weeks
to fix what was an extremely unfortunate situation.”15 Chan’s recent deposition
testimony also purportedly reveals that the Preferred Directors did not retain counsel
14
Pl.’s Reply in Supp. of His Mot. to Compel (D.I. 52) ¶ 2.
15
Id., Ex. 1 (emphasis supplied).
Eric Gilmore v. Turvo, Inc.
C.A. No. 2019-0472-JRS
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prior to the May 21 meeting, that Latham did not represent Chan personally and that
Chan and Ajami each had their own counsel.16
Finally, Mr. Gilmore argues that Latham made certain representations that
reveal its role as counsel to Turvo and the Board. For example, in the minutes from
the May 21 meeting, which Latham drafted, Latham characterized its work as
conducting an “internal investigation.”17 Additionally, in an email to Mr. Gilmore
dated May 22, 2019, Latham’s Joseph B. Farrell referred to himself “as counsel to
the Special Committee of the Board of Directors,” even though that committee was
not formed until May 23, 2019.18
II. ANALYSIS
Having carefully reviewed Mr. Gilmore’s proffered evidence, I see no basis
to conclude that Latham served as counsel to the Board before the May 21 Board
meeting such that Mr. Gilmore should be given access to the privileged
16
Chan. Dep. Tr. 32:7–9; 32:20–22; 32:23–24; 93:3–4; 93:5–6; 92:23–93:2.
17
DAB, Ex. 1 at TURVO-00002112.
18
POB, Ex. C.
Eric Gilmore v. Turvo, Inc.
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communications between the Preferred Directors, the preferred stockholders and
their chosen counsel. Without this predicate attorney-client relationship between
Latham and the Board, Mr. Gilmore is an outsider to the relationship and has no
right to pierce or otherwise enter it.
As a general matter, a Delaware corporation “cannot assert the privilege to
deny a director access to legal advice furnished to the board during the director’s
tenure.”19 Mr. Gilmore correctly acknowledges three exceptions to the rule, and
argues that because none of them applies, he is entitled to discover the disputed
communications.20 But there is an important condition to Mr. Gilmore’s purported
entitlement: that Latham’s legal advice be “furnished to the board.”21 Indeed, in
Moore, the court permitted the plaintiff-director access to disputed communications
because:
19
Moore Bus. Forms, Inc. v. Cordant Hldgs. Corp., 1996 WL 307444, at *4 (Del. Ch.
June 4, 1996) (citations omitted); accord Kalisman v. Friedman, 2013 WL 1668205, at *4
(Del. Ch. Apr. 17, 2013).
20
POB ¶ 8–9 (quoting Kalisman, 2013 WL 1668205, at *5).
21
Id.Eric Gilmore v. Turvo, Inc.
C.A. No. 2019-0472-JRS
August 19, 2019
Page 8
The client in this case is the Holdings board. Mr. Rogers was a member
of that board, having the same status as the other directors. No basis
exists to assert the privilege against him . . . .22
In contrast, the court in SBC Interactive, Inc. v. Corp. Media Partners held that a
general partner seeking to withdraw from the partnership had no reasonable
expectation that it was a client of the partnership’s in-house counsel.23
In each of the decisions Mr. Gilmore cites in support of his claim that he is
entitled to access otherwise privileged information, the courts made clear in the
privilege analysis that the counsel from whom privileged information was sought
represented the board.24 In other words, the courts made clear that the director
seeking the privileged information had a reasonable expectation that the attorney(s)
in question were representing all members of the board. Mr. Gilmore fails to make
that showing here. There was no act by the Board to hire Latham as Board counsel
prior to the May 21 meeting. Nor is there any indication that Latham had agreed to
22
Moore, 1996 WL 307444, at *6.
23
1997 WL 770715, at *5 (Del. Ch. Dec. 9, 1997).
24
See, e.g., Moore, 1996 WL 307444, at *5; SBC Interactive, 1997 WL 770715, at *4;
Kalisman, 2013 WL 1668205, at *4.
Eric Gilmore v. Turvo, Inc.
C.A. No. 2019-0472-JRS
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represent the Board prior to that meeting. Offhand comments from the Preferred
Directors in which they express some confusion over Latham’s pre-May 21 role are
not sufficient to allow Mr. Gilmore to insert himself within the privilege domain.
Nor am I persuaded that the May 21 Board resolution undermines the nature of
Latham’s initial representation. Assuming the Board was authorized to make any
resolutions at the May 21 meeting, it was entirely within its business judgment to
determine that the company should pay the Preferred Directors’ fees by deeming
Latham to have been working on behalf of the company prior to May 21 as it aided
in the investigation of potential wrongdoing by the CEO.25
What the record does reveal is that Latham had a preexisting relationship with
a preferred shareholder that led to its representation of that shareholder’s designated
director—a practice not uncommon among law firms and their longstanding
25
Whether Turvo should pay for the legal services rendered prior to the May 21 meeting
is a separate issue that I have not been asked to decide, although the issue may well
resurface should Plaintiff prevail in this litigation.
Eric Gilmore v. Turvo, Inc.
C.A. No. 2019-0472-JRS
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corporate clients.26 That this preexisting relationship led Latham to provide advice
to the other Preferred Directors who shared a common interest with Sarracino and
Activant does nothing to undermine the claim of privilege or to inject Mr. Gilmore
into the attorney-client relationship.27 Indeed, the Preferred Directors’ aligned
interests, and the separation of those interests from those of the common
stockholder(s), is reflected in the “Amended and Restated Voting Agreement,”
whereby the parties agreed that the CEO and a Board member (Mr. Gilmore) would
be appointed by the common stockholders and the Preferred Directors would each
be appointed by Turvo’s preferred stockholders.28 Thus, even before May 10, the
Preferred Directors expressed amongst themselves and to Mr. Gilmore that they had
common interests that might diverge from, or at least differ from, Mr. Gilmore’s
interest as a common stockholder and as the common stockholder’s Board
26
DAB ¶ 6. I also note that this preexisting relationship gives me some comfort that the
Preferred Directors did not set out to establish a backdoor to hiring Latham as Board
counsel while shielding their communications from Mr. Gilmore.
27
D.R.E. 502(c)(6).
28
DAB ¶ 4.
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C.A. No. 2019-0472-JRS
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designee.29 Those interests certainly did diverge if, as alleged, Mr. Gilmore as CEO
diverted substantial company funds to support his personal proclivities.
For the foregoing reasons, Mr. Gilmore’s motion to compel is DENIED.
Very truly yours,
/s/ Joseph R. Slights III
29
Of course, this is not to suggest that the directors’ fiduciary duties differed or that all
Board members were not expected to share a unified interest in acting for the best interests
of Turvo and all its stockholders. I simply note that the Amended and Restated Voting
Agreement reflects that the different classes of stockholders appreciated that their interests
may diverge depending on the circumstances. See generally, In re Trados, Inc. S’holder
Litig., 73 A.3d 17, 42 (Del. Ch. 2013) (acknowledging the reality that the interests of
common and preferred stockholders can diverge).