Governance Rashomon: don't be confused: all directors are equal.

• Author: Kaback, Hoffer
• Position: QUIDDITIES

THE CLASSIC FILM "Rashomon" is the story of an incident from the viewpoints of the several different principals. Their accounts differ.

This same phenomenon obtains in the world of governance. A recent example is that of the tonally disparate reactions from two major law firms--longtime adversaries in the M&A world--to a Delaware Chancery Court opinion. A twist is that, to some extent, what one might have expected to read in the analysis by Wachtell Lipton (often representing companies defending against takeovers) appears in that of Skadden Arps (often representing bidders), and vice versa. Furthermore, on an important governance point, my own view differs from that set forth in the opinion. And so: governance Rashomon.

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The case is Kalisman v. Friedman, involving the governance of Morgans Hotel Group. Morgans's largest stockholder was OTK Associates. Jason Kalisman of OTK has been a director of Morgans since April 2011. In December 2011, Morgans set up a special committee, including Kalisman, to consider strategic alternatives. They stopped work in November 2012. Shortly after the Ides of March, 2013, OTK started a proxy fight. The special committee revived its consideration of strategic alternatives, but froze Kalisman out of information. He was told that nothing was going on. But, on March 29, Kalisman received notice of a special committee meeting the next day to approve a recapitalization, as a result of which a third party new stockholder would own 32% of Morgans stock. Too, the special committee formed a subcommittee; it comprised the members of the special committee except Kalisman.

Kalisman objected. Morgans approved the recapitalization and changed the stockholders' meeting from May 15 to July 10. Kalisman challenged these actions. He also subpoenaed information from the company's lawyers. Even though they had furnished legal advice to all other directors, they asserted attorney-client and work product privileges against Kalisman.

Vice Chancellor J. Travis Laster enjoined the recapitalization, first stating that:

1. A director's right to information is unfettered. A company cannot choose which of its directors receives which information.

2. A corporation cannot assert legal privilege to deny a director access to legal advice given to the board. A director has a right to the information correlative to his duty to protect and preserve the corporation.

3. A board or special committee can withhold privileged...