McDermott, Will & Emery v. Superior Court

Introduction

May a shareholder sue its corporation’s outside counsel in a derivative action for legal malpractice arising out of counsel’s representation of the corporation, where the corporation refuses a proper demand to commence the action? Under the procedural posture of this case (a denial of a motion for judgment on the pleadings), we are not called upon to address the merits of this lawsuit or whether such a suit would subsequently be dismissed under the business judgment rule. Rather, we are asked to decide whether, assuming all procedural requirements have been met and the directors’ bad faith is properly alleged, such a derivative suit against outside counsel may go forward.

Although shareholders, upon meeting certain prerequisites, may proceed in a derivative action against a third party to recover for harm done to the corporation, a derivative lawsuit for malpractice against corporate outside counsel raises unique attorney-client privilege issues. Because the shareholders are not the holder of the privilege, they do not effect a waiver of that privilege merely by filing their action on the corporation’s behalf. As a result, in the absence of a waiver by the…