A recent court decision exemplifies the challenges that businesses face in attempting to predict the law that will control privilege questions. The court decided that the law of the state where the court is located governs such questions with the result that the protections afforded confidential communications may change or disappear entirely depending on where a lawsuit is filed. Such an approach creates uncertainty for many businesses that may be subject to lawsuits in multiple jurisdictions.
In May 2017, a New York appellate court in People v. PriceWaterhouseCoopers, LLP held that New York law does not recognize an accountant-client privilege, affirming a court order that had compelled an accounting firm and its client to produce documents that had been withheld based on such a privilege. The court concluded that, in discovery proceedings and trials in New York state courts, New York law governs privilege issues. The court did not consider Texas law on the privilege issue, refusing to conduct an "interest-balancing" analysis that would have considered the interests of the state where the party relying on the privilege is located.
Conflicting court decisions on important privilege questions increase uncertainty, creating a heightened risk of waiver, particularly in mergers and acquisitions, and other business transactions. In such transactions, legal and business issues are often intertwined, and courts have reached different results on whether attorneys, including in-house counsel, waive the attorney-client privilege when combining business advice with legal advice in the same communications.
Similarly, disclosures to the client's other business advisors as well as to the other parties in a transaction are commonplace in mergers and acquisitions, particularly during due diligence and negotiations. But courts have reached opposite results on whether disclosure of privileged information to a client's investment banker, for example, waives the attorney-client privilege. Courts are also divided on whether disclosures of privileged information to the other party to a transaction constitute a waiver.
Last year, New York's highest court concluded that, under New York law, the sharing of privileged information between the two parties to a merger, before the merger was closed, waived the attorney-client privilege. In Ambac Assur. Corp. v. Countrywide Homes Loans, Inc., the New York Court of Appeals held that the exception to the waiver rule for disclosures between parties with a "common interest" does not extend to "communications made in the absence of pending or anticipated litigation." But other courts, including some federal courts, have extended the "common interest" exception to protect communications between parties in transactions without the additional "litigation" requirement.
Further complicating privilege considerations, courts also disagree on the party that controls the privilege after a transaction closes. Last year, in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, a Delaware appellate court held that in a merger or stock sale, the buyer acquires control, under a Delaware statute, over all property and rights, including rights to privileged communications between the seller and the seller's counsel, absent an agreement to the contrary. Appellate courts in other states, including New York, have limited the transfer of rights to the buyer after closing only to privileged communications about "general business" matters as opposed to communications about the transaction. Courts also disagree on the party that controls privileged communications after an asset sale.
Businesses must continue to balance the need for some disclosures to facilitate transactions with the preservation of the attorney-client privilege and may decide, intentionally, to waive the privilege when necessary. Plan to discuss these issues in detail with legal counsel in the early planning for an anticipated transaction. Although each transaction has its own unique risks, here are some typical issues to be addressed:
- To what group of key client employees should dissemination of privileged communications be limited while still allowing for informed decisions based on such communications?
- What steps should be taken to avoid intertwining legal issues with business issues in the same communications between counsel and the client?
- Do outside advisors, such as accounting firms and investment bankers, need access to privileged communications? If so, what limitations should be imposed on such access?
- How should disclosures to other parties during due diligence be limited to preserve protection for privileged communications and attorney work product? Where are the greatest risks from such disclosures? Litigation and insurance? Intellectual property? Environmental? Antitrust?
- How can agreements between the buyer and seller provide protections both during negotiations and due diligence and after closing?
Given the difficulty of predicting applicable law and the conflicting results that courts have reached on critical privilege questions, businesses should take precautions to avoid inadvertent waivers of the attorney-client privilege.