During the negotiations for a merger, asset purchase, stock purchase or other business combination or M&A transaction, the prospective buyer typically insists on receiving considerable confidential information regarding the assets and liabilities of the target, including its contingent liabilities. One of the more troublesome problems related to the disclosure of confidential information during the due diligence process is how to effect disclosures to facilitate a meaningful evaluation of litigation‑related confidential information without waiving any work product protections, attorney‑client privileges, and similar protections and privileges.
To address the protection of confidential information, the parties typically enter into a relatively brief agreement in which each recipient of confidential information promises to maintain the confidentiality of the information provided. The agreement, which is often referred to as a “confidentiality agreement,” a “nondisclosure agreement” or simply an “NDA,” constitutes an attempt to allow the seller to furnish to the buyer confidential information without waiving the seller’s work product protection, attorney‑client privilege and similar protections to protect nonpublic information from public disclosure by demonstrating that the buyer and seller have, or should be presumed to have, common legal and commercial interests in protecting the confidentiality of the information or are or may become joint defendants in litigation.
An NDA may be disregarded by a court and may even “flag” the issue of privilege waiver for adverse parties which obtain the agreement. Further, there may be instances when the recipient is an actual or potentially adverse party in a transaction or litigation with the disclosing party, such as when litigation is the driving force behind an acquisition. In those cases, the language of the NDA is intended to bolster a claim by the disclosing party that the recipient is later precluded from using disclosure as a basis for asserting in litigation that the privilege was waived.
Whether a work product protection or attorney‑client privilege will be deemed to be waived as a result of disclosures under an NDA depends on the law applied by the forum jurisdiction and the forum jurisdiction’s approach to the joint defendant and common interest doctrines discussed below. In most jurisdictions, work product protection will be waived only if the party discloses the protected documents in a manner which substantially increases the opportunities for its potential adversaries to obtain the information. By contrast, the attorney‑client privilege may be waived as a result of voluntary disclosure to any third party, unless the forum jurisdiction applies a form of the joint defense or common interest doctrines.
Work product doctrine
The work product doctrine protects documents prepared by an attorney in anticipation of litigation or for trial. The threshold determination is whether the material sought to be protected was prepared in anticipation of litigation or for trial. Work product protection, codified in Federal Rules of Civil Procedure section 26(b)(3), allows protected material to be obtained by the opposing party only upon a showing of substantial need and undue hardship. Since this form of protection relates strictly to documents prepared in anticipation of litigation or for trial, documents prepared for the purposes of a specific business transaction are not protected by the work product doctrine in the absence of anticipated or pending litigation.
In most jurisdictions, a waiver of the work product protection can occur where the protected communications are disclosed in a manner which substantially increases the opportunity for potential adversaries to obtain the information. Waiver of work product protection by sharing the work product with one adversary can result in waiver as to other unrelated adversaries. The question is whether the particular disclosure was of such a nature as to enable an adversary to gain access to the information. Disclosure under a confidentiality agreement militates against a finding of waiver, for it is evidence the party took steps to insure that its work product did not land in the hands of its adversaries. In a minority of jurisdictions, the waiver of work product protection depends on whether the parties share a common legal interest, and courts will apply the same analysis discussed below for the waiver of attorney‑client privilege.
Attorney-client privilege
The attorney‑client privilege protects communications of legal advice between attorneys and clients, including communications between corporate employees and a corporation’s attorneys, to promote the flow of information between clients and their attorneys. The privilege applies only if (1) the asserted holder of the privilege is, or sought to become, a client; (2) the person to whom the communication was made is a lawyer or his subordinate and in connection with this communication is acting as a lawyer; (3) the communication relates to a fact of which the attorney was informed by his client without the presence of strangers for the purpose of securing primarily an opinion on law, assistance in some legal proceeding or other legal services, and (4) in each case the privilege has been claimed and not waived by the client. Although the attorney-client privilege does not require ongoing or threatened litigation, it covers only “communications” between the lawyer and his client for the purposes of legal assistance.
The core requirement of the attorney-client privilege is that the confidentiality of the privileged information be maintained. Therefore, the privilege is typically waived when the privilege holder discloses the protected information to a third party. A waiver of attorney-client privilege destroys the attorney-client privilege with respect to all future opposing parties and for the entire subject matter of the item disclosed.
The courts have developed two doctrines of exceptions to the waiver of the attorney-client privilege through voluntary disclosure. The “joint defendant rule,” embodied in Uniform Rules of Evidence section 502(b)(5), protects communications relevant to a matter of common interest from disclosure “among lawyers and their representatives representing the same client,” and ordinarily applies strictly to clients of the same lawyer who are joint defendants in litigation. Several courts have expanded the joint defense doctrine in order to create another privilege waiver exception: the doctrine of common interest. Under the common interest doctrine, privileged information can be disclosed to a separate entity that has a common legal interest with the privilege holder, whether or not the third party is a co-defendant.
Federal circuit courts and state courts diverge in their interpretations and applications of the common interest and joint defendant doctrines. Some federal courts have extended the common interest exception to communications in furtherance of any common legal interest and do not require that shared communications relate to pending or anticipated litigation. They allow attorneys representing different clients with similar legal interests to share information without having to disclose it to others in civil and criminal litigation, and even in purely transactional contexts these courts apply the common interest doctrine to the full range of communications otherwise protected by the privilege as it encourages parties with a shared legal interest to seek legal assistance in order to meet legal requirements and to plan their lawful conduct accordingly.
Delaware has codified the common interest privilege, extending the attorney-client privilege to certain communications by clients, their representatives or their lawyers to a lawyer representing another in a matter of common interest. Delaware recognizes that disclosure may be confidential even when made between lawyers representing different clients if those clients have a common interest – that is, an interest that is so parallel and non-adverse that, at least with respect to the transaction involved, they may be regarded as acting as joint venturers. More restrictive courts require that the parties share an identical legal, as opposed to purely commercial, interest.
Finally, some courts persist in rejecting the common interest theory absent actual or pending litigation in which both parties are or will be joint defendants. In Ambac Assurance Corp. v. Countrywide Home Loans, Inc., the New York Court of Appeals held that the attorney-client privilege is waived when privileged information is shared between two entities in process of merging because, for the common interest doctrine to apply in New York, the communication must also relate to litigation, either pending or anticipated. The court refused to apply the common interest doctrine to communications between parties to a merger after the merger agreement was signed but before closing.
The Texas law is comparable to New York in requiring actual or pending litigation to be involved for the communication to be privileged. In In re XL Specialty Ins. Co., the Texas Supreme Court held that Texas requires that the communications be made in the context of a pending action. (See Texas Rules of Evidence section 503(b)(1)(C), which protects from disclosure communications between a client “to a lawyer … representing another party in a pending action and concerning a matter of common interest therein.”) Texas’ privilege is not a “common interest” privilege that extends beyond litigation. Nor is it a “joint defense” privilege as it applies not just to defendants but to any parties to a pending action.
Although there is no uniform test for application of the common interest doctrine, courts have consistently examined three elements when applying the doctrine: (1) whether the confidentiality of the privileged information is preserved despite disclosure; (2) whether, at the time that the disclosures were made, the parties were joint defendants in litigation or reasonably anticipated litigation; and (3) whether the legal interests of the parties are identical or at least closely aligned at the time of disclosure.
Waiver in M&A transactions
The core requirement of the common interest doctrine is the existence of a shared legal interest. Courts will have less difficulty in finding an exception to a waiver when the parties to the purchase agreement actively pursue common legal goals. An agreement in which the buyer does not assume the litigation liability of the seller does not demonstrate an alignment of the parties’ interests. Disclosures by an entity or its counsel to the investment banking firm during merger discussions have resulted in a waiver of the attorney-client privilege because the common interest rule protects communications between one party and an attorney for another and that the investment banking firm’s legal interest in the threatened litigation was not anything more than peripheral, notwithstanding that investment bankers may be brought into litigation as aiders and abettors.
Although the consummation of a transaction is not determinative, the interests of the parties may become closely aligned as a result of the closing and, thus, there is a higher probability that information will remain protected in a transaction that closes and in which the buyer assumes liability for the seller’s litigation than in a transaction that does not close and in which the buyer does not assume the liability. Generally, (1) in a statutory merger the surviving corporation can assert the attorney-client privilege, (2) in a stock-for-stock deal the privilege goes with the corporation, although in some cases the buyer and seller may share the privilege, and (3) in the case of an asset sale some cases hold no privilege passes to the buyer because the corporate holder of the privilege has not been sold while others hold that a transfer of all of sellers right, title and interest in the assets of a business effectively transfers the right to assert or waive the privilege.
The Delaware Court of Chancery in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP held that under section 259 of the Delaware General Corporation Law, all privileges, including the attorney-client privilege, pass from the acquired corporation to the surviving corporation in a merger absent a provision in the merger agreement to the contrary. The case arose when the acquirer sued the seller over a year after consummation of the merger alleging it had been fraudulently induced to enter into the merger and notified the seller that among the computer files it received in the merger were pre-merger communications between the acquired company and its deal counsel. Even though the seller had not taken the steps of protecting the privileged communications by a merger agreement provision or the physical removal of the communications from the computer files received by the buyer, the sellers asserted continuing privileged control of the attorney client communications.
The opinion by Chancellor Leo Strine (now Chief Justice of the Delaware Supreme Court) in Great Hill literally applied section 259, which provides that in a merger “all … privileges” become the property of the surviving corporation in explaining his holding that the target’s attorney-client privilege vested in the surviving corporation in the merger. The Chancellor wrote that “all means all.” The court emphasized, however, that parties can modify the statutory default rule by including in the merger agreement (or an ancillary agreement) a provision specifying who retains control over privileges, including privileged communications relating to the negotiation of the merger. Great Hill also highlights the need to take practical steps to ensure that the parties’ agreements over who maintains control over privilege are given effect, such as by taking steps to remove communications as to which the seller wants to continue to control privilege from the computer systems transferred to the buyer.
Great Hill was followed on May 29, 2019 by the Delaware Chancery Court in Shareholder Representative Services LLC v. RSI Holdco, LLC in which the court upheld (and quoted) a provision in a private-company merger agreement which (i) required buyer to preserve the attorney-client privilege for the seller, (ii) reserved to the seller control of the privilege and (iii) precluded the buyer from using the seller’s privileged emails against the seller in post-closing litigation. The Great Hill and RSI cases provide a roadmap for drafting merger agreement provisions to protect pre-merger communications between a target company’s owners and representatives and the target company’s counsel from use by the buyer in a post-closing dispute.
Privilege-related provisions relating to legal counsel
To address questions regarding who will control the attorney-client privilege after a merger in view of the Great Hill and RSI cases and also the ability of counsel to the seller to continue representing the seller after the acquisition, an acquisition agreement could contain a provision providing (1) that the parties acknowledge that the acquired company and its shareholders have retained the law firm to act as their counsel in connection with the transactions; (2) that the buyer agrees that, in the event that a dispute arises between the parties, the law firm may represent the seller in such dispute even though the interests of seller may be directly adverse to the buyer and even though the law firm may have represented the company in a matter substantially related to such dispute or may be handling ongoing matters for the seller; (3) that the buyer waives any claim that any of them have or may have that the law firm has a conflict of interest in connection with or is otherwise prohibited from engaging in such representation, and (4) that as to all communications between the law firm and seller that relate in any way to the transactions contemplated by the agreement, the attorney-client privilege, the expectation of client confidence and all other rights to any evidentiary privilege belong to the seller and may be controlled by seller and shall not pass to or be claimed by buyer or the acquired company.
Conclusion
Parties typically have to share confidential information in an M&A transaction in order that the parties can make informed business decisions regarding the transaction. Such information sharing exposes the disclosing party to the risk that the disclosure may result in a waiver of any existing privileges against disclosure otherwise available. The parties can include provisions in their M&A agreements which memorialize their common interest in maintaining the confidentiality of information shared and thereby reduce the risks of a waiver of attorney-client privilege and work product protections. Preservation of attorney-client and other privileges protecting confidential information from disclosures to adversaries, however, can be complicated matters and results can vary from jurisdiction to jurisdiction.
Byron F. Egan is partner at Jackson Walker, L.L.P. in Dallas. Bryan D. McCrory is associate general counsel of Dave & Buster’s, Inc. in Dallas