How to Maintain Attorney-Client Privilege in M&A Deals
Attorney-client privilege protects most communications between a lawyer and his or her client where legal advice is sought or provided. Issues with this privilege, however, can arise in the context of mergers and acquisition transactions and create unexpected problems. While there has been a significant body of case law developed in recent years addressing privilege during the course of negotiations and after a deal closes, courts have applied a variety of approaches, which can complicate businesses’ efforts to guard against inadvertent waiver or transfer of the privilege.
Generally speaking, the attorney-client privilege is waived when a protected document is or other communication shared with a third party. This can create issues in M&A transactions because companies often disclose sensitive information with one another and members of their transaction teams in the due diligence process ahead of the closing, which often include investment bankers and consultants - parties not covered by privilege.
Courts generally recognize an exception to the waiver rule, known as the “common-interest privilege.” This protects otherwise privileged communications that are shared between parties and their attorneys when it can be shown that the communications were made to further a legal interest or strategy that is shared by the parties. The confusion lies in the fact that there are a lot disagreements about what constitutes a “shared legal interest,” and the extent to which it must be shared by the parties.
New York courts have historically taken a more strict approach to evaluating whether parties to a merger share a common legal interest. One of the most recent cases to address the issue, Ambac Assur. Corp. v. Countrywide Home Loans Inc., arose when a third party sought discovery of Countrywide documents related to a merger with Bank of America. In June, the New York Court of Appeals overturned a lower court and ruled the threat of litigation was necessary in order to maintain the privilege. “Defendants have not presented any evidence to suggest that a corporate crisis existed in New York over the last twenty years when our courts restricted the common interest doctrine to pending or anticipated litigation,” the court wrote in its decision, adding that “we doubt that one will occur as a result of our decision today.”
Delaware has adopted a more broad reading of the common-interest doctrine, holding that litigation doesn’t have to be “pending or reasonably anticipated.” In a 2010 case, 3Com Corp. v. Diamond II Holdings Inc., the court held that the analysis of whether the privilege applies depends on whether the parties were adverse to each other at the time the communication was made. If the parties were in common interest with respect to the matters addressed, then the communication remains privileged. The court did indicate that the parties may not be able to claim privilege over certain communications made between them during negotiations of a side letter and the termination provisions of the merger agreement.
Most courts have taken a position consistent with Delaware and have held that there doesn’t need to be pending litigation in order for there to be a “common interest.” Another notable issue is whether the inclusion of an investment banker amounts to waiver of the privilege. These individuals are often included in corporate transactions and Delaware has held their participation won’t destroy the privilege as long as the person making the disclosure thought it was confidential “and, if there was an expectation of confidentiality, whether the law will sanction that expectation.” Other courts have held that a party cannot claim privilege in these situations because the shared interest impacting the banker would be financial, not legal.
Separate from whether communications exchanged during negotiations will be privileged, parties to a merger or acquisition must also consider issues that can arise after the deal has closed. Three decades ago, the Supreme Court recognized in Commodity Futures Trading Commission v. Weintraub that as a general rule, the attorney-client privilege belongs to the successor corporation and the new management will have the authority to assert and waive the privilege. But there are exceptions to this rule.
The New York Court of Appeals, for example, has found privileged communications that relate to the merger and its negotiations are retained by the seller after the transaction has been finalized. Another important decision addressing the treatment of attorney-client privilege after an acquisition came in the Delaware Chancery Court’s 2013 decision in Great Hill Equity Partners IV LP v. SIG Growth Equity Fund I LLLP. In that case, the court held that while the Supreme Court’s rule Commodity Futures rule still applies, parties can contract around a transfer of the privilege in the merger documents.
It can also be difficult to determine who controls the privilege post-close when there is a sale of assets, as opposed to a full merger. Courts will often examine the facts on a case-by-case basis, looking at the “practical consequences” of the transaction. This includes analyzing factors such as the extent of the assets acquired and whether old customers or employees were retained. When the “practical consequences” result in the transfer of control of the business, courts have held the authority to assert or waive privilege will follow as well.
One example came in Postorivo v. AG Paintball Holdings Inc., when the Delaware Court of Chancery held control over pre-merger communications remained with the seller when the sale was not for all of the assets and the parties agreed by contract that privilege would remain with the seller. In another case, Soverain Software LLC v. Gap Inc., a Texas district court found the privilege belonged to the buyer because it continued the business of the seller by, among other things, using acquired patents to sell the same product.
There are a number of privilege issues that arise in the context of mergers and acquisition transactions. Because the approaches taken by courts can differ, parties in a transaction should pay close attention to the law that would govern a dispute. As a precautionary measure, it is often best to assume that communications made before a merger agreement has been signed, those made without attorneys involved and those shared with an investment banker won’t be covered by attorney-client privilege. Also, when information is exchanged, limit the number of people who receive it and make sure it is marked confidential.
Sellers in an M&A transaction should negotiate a contractual retention of privilege related to the negotiation of the sale in the event there is a dispute between the parties (which occurs more often than most clients would expect). In such a case, the buyer should attempt to control the context in which, and to whom, such information can be disclosed by the seller.