Private Equity

Most deals are never litigated.  However, some are and it’s always good to reflect on how the risk of future litigation could or should impact what we do in the course of a deal.  Transaction-related litigation can include (amongst others) proceedings related to post-closing adjustments, claims for breaches of reps and warranties, shareholder (including class action) litigation (if a public company is involved), and busted deal litigation, including MAC/MAE claims and attempts to enforce tentative agreements.

If a closed, pending or failed transaction goes down the litigation route, it can be vitally important to be able to assert privilege over both requests for, and the receipt of, confidential legal advice in connection with the transaction.  It therefore can be penny wise and pound foolish not to keep in mind certain basic principles that maximize the ability to protect legal inquiries and advice from discovery by the adversary should there be litigation.  These principles include:

• In general, privilege applies where legal advice is sought from, and/or provided by, a professional legal advisor in his or her capacity as such, and the related communications are made and maintained in confidence, unless the client chooses to (or, by conduct, is found to) waive the privilege;
• Thus, confidential communications seeking or conveying legal advice or developing the facts necessary for the rendition of legal advice – even when on-passed from one non-lawyer to another non-lawyer within the client – can be protected from discovery given the particular facts (such as the identity or role of the persons involved and depending on which state’s law applies);
• Maintenance of confidentiality (i.e., no sharing with the other side or third parties) is essential, but privileged matter may not lose its protected nature if confidentially shared among parties with a common interest, including, in some states, the parties who have entered into a merger agreement, even before the closing;
• In the U.S., privilege attaches whether the lawyer involved is an outside law firm or in-house counsel – but in the E.U., in-house counsel communications are not subject to privilege;
• In the case of in-house counsel wearing both a business hat and a legal hat, privilege will only arise from communications with the in-house lawyer if and to the extent (depending on the state) she or he is wearing a lawyer’s hat (which may be less than clear in any given circumstance);
• Involvement of outside advisers, such as bankers and accountants, do not necessarily destroy the privilege (again depending on what state’s law applies) to the extent they are part of the communication if they have an obligation of confidentiality, but work done by such non-legal advisors will only be privileged if the purpose of their work is to assist a lawyer in the rendering of legal advice;
• Deal documentation can seek to protect the seller’s right to its confidential privileged communications even if in the files/computer systems of the target that buyer is acquiring.  Seller’s privileged communications with in-house and/or outside counsel, including as communicated to management or the board of the target, relating to, for example, the sale process (or, for that matter, management’s privileged communications related to, e.g., its negotiations over compensation or equity interests with the buyer) may be in the electronic or hard copy files of the target which are being transferred to the buyer.  Accordingly, preservation of privilege – and keeping such privileged communications from the buyer – requires a specific “carve-out” provision in the merger agreement.  It does little good for seller or target to have preserved and protected the privilege up to the closing if the seller’s privileged communications ultimately end up belonging to the buyer, especially in the event of post-closing litigation between buyer and seller;
• Marking documents and emails which are arguably subject to the attorney-client privilege “confidential”, “for the purpose of obtaining legal advice”, and “privileged” – or using similar labels or explaining the privileged context in text – is always a smart approach, though not determinative as to whether a privilege claim ultimately will be upheld by a court; and
• Once litigation is reasonably anticipated, there can be additional protections available under the work-product doctrine.

These basic rules, which obviously are only a surface and simplified treatment, are things that are important to keep in mind during the deal-making process.  At the end of the day, whether you can successfully assert privilege may be outcome determinative when disaster strikes and the deal ends up as the subject of a lawsuit or arbitration.

Please reach out to your Weil contact if you want help in developing procedures designed to maximize your ability to protect privileged communications from discovery.