One of the interesting recurring issues arising in M&A transactions is the question of the extension of attorney client privilege to information shared during transactional due diligence. In the following guest post, Joseph B. Crace, Jr. and Britt K. Latham take a look a recent New York Court of Appeals decision examining the question of the extension of the common interest doctrine to privileged information shared between parties to a prospective merger. A version of this article was originally published by Bass, Berry & Sims in the firm’s annual “Securities & Shareholder Litigation 2017: A Look Ahead” (here). I would like to thank Joe and Britt for their willingness to publish their article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Joe and Britt’s guest post.
In June, New York’s highest court issued an important decision narrowing the application of the common interest doctrine under New York law, causing New York to diverge from Delaware and numerous other jurisdictions that use the common interest doctrine to extend attorney—client privilege protection to certain communications between parties to an M&A transaction. How will this deepening split of authority impact parties going forward?
During the due diligence process, parties to a prospective merger and their counsel often discuss sensitive legal and/or regulatory matters and exchange what ordinarily might be considered privileged documents and information. Parties believe such exchanges are necessary to ensure that both parties to the transaction are “on the same page” regarding what soon will become the legal obligations of the combined company. Parties typically rely upon the common interest doctrine to shield these exchanges from a later claim that the privilege has been waived — an exception to the traditional rule that attorney—client communications made in the presence of, or otherwise disclosed to, a third—party results in a waiver of the privilege. The common interest doctrine preserves the privilege as long as the parties share a “common legal interest” in the subject matter of the privileged communications.
Two “Common” Approaches
Courts have approached the common interest doctrine in two different ways. Traditionally New York and a handful of other states have imposed a “litigation requirement” on the common interest doctrine, requiring not only a shared legal interest between the parties, but that the communications at issue relate to pending or anticipated litigation in order to avoid waiver. Other jurisdictions, notably Delaware, have moved away from a “litigation requirement” and extended the common interest doctrine to any circumstances where two or more entities have shared legal interests, including a shared interest in a signed merger agreement or other pending transaction. This exception has even been codified in Delaware law.
In recent years, the thought was that the courts of most states (and federal jurisdictions) would gravitate toward the Delaware approach as being the more “modern” of the two, and consistent with the most recent Restatement of the Law Governing Lawyers. In 2014, an intermediate New York appellate court attempted to expand the scope of New York’s common interest doctrine to parallel Delaware and other jurisdictions, holding that a plaintiff could not take discovery of certain attorney—client communications shared between Countrywide and Bank of America when they were in the process of merging. The intermediate court held that Countrywide and Bank of America had “a common legal interest because they were engaged in merger talks during the relevant period and [had] a completed and signed merger agreement. Indeed, the circumstances presented in this case illustrate precisely the reason that the common interest privilege should apply — namely, that business entities often have important legal interests to protect even without the looming spectre of litigation.” Ambac Assurance Co. v. Countrywide Home Loans, Inc., 2014 N.Y. Slip Op. 08510 (App. Div. 1st Dep’t Dec. 4, 2014).
The New York Ruling
With respect to New York, such hopes for expansion of the doctrine proved short—lived. In Ambac Assurance Corp. v. Countrywide Home Loans, Inc., 27 N.Y.3d 616 (2016), the New York Court of Appeals declined to extend the protection of the common interest doctrine to privileged communications shared between parties to a prospective merger, unless the parties share a common legal interest and the privileged communications at issue relate to pending or reasonably anticipated litigation. The New York Court of Appeals reversed the lower appellate court, refused to “[e]xpand the common interest doctrine to protect shared communications in furtherance of any common legal interest,” and adhered to “the litigation requirement that has historically existed in New York.”
Among other things, the court found that Bank of America had not offered any compelling justification for expanding the scope of the common interest doctrine under New York law, and that “[a]ny benefits that may attend such an expansion of the doctrine are outweighed by the substantial loss of relevant evidence, as well as the potential for abuse. The difficulty of defining ‘common legal interest’ outside the context of litigation could result in a loss of evidence of a wide range of communications between parties who assert common legal interests but who really have only non—legal or exclusively business interests to protect.”
Attorneys working on potential transactions governed by New York law should consider this development when conducting due diligence and responding to information requests.
Best Practices for the Year Ahead
As a general matter, regardless of the jurisdiction in which a transaction may take place, or the governing law that may be deemed operative, parties to a transaction and their counsel should take basic precautions to maximize the probability that a court will find the common interest doctrine applicable and avoid a claim of waiver, including:
Timing: Wait until a merger agreement has been signed, or as late in the process as possible, before exchanging potentially privileged information or discussing sensitive legal or regulatory issues. The closer the transaction is to closing, the stronger the argument will be that a common legal interest exists.
Know What You are Disclosing: It goes without saying that parties should make every effort to familiarize themselves with documents exchanged during due diligence, and to understand the potential privilege implications beforehand.
Documentation: Both parties and their counsel should sign a Confidentiality and Common Interest Agreement documenting in writing that information is being exchanged in confidence and subject to the common interest privilege. If the parties can reasonably tie any disclosures to “pending or reasonably anticipated litigation” (which the court in Ambac does not define), they should do so in writing.
Separate Discussion of Common Legal Interests from Business Interests: Don’t mix legal and business communications, and make sure that anyone copied on any written correspondence or information exchange has a valid legal reason for being on a conference call or email chain.
Discuss Instead of Exchange: If you can avoid the actual physical exchange of potentially privileged documents and attorney work product, then by all means do so, especially if a telephone call between the parties and their respective counsel could accomplish the same purpose.
Consider Jointly Retaining Counsel: In jurisdictions where the viability of the common interest doctrine appears particularly uncertain, parties to a prospective merger should consider jointly retaining special counsel to advise them on matters in which they share a legal interest, but which might not be sufficiently litigation—related to avoid the risk of a waiver. The Ambac court acknowledged that becoming “co—clients” of the same attorney or law firm might be one means by which parties to a prospective transaction could preserve the attorney—client privilege with respect to sensitive discussions.