Best Practices to Maintain the Privilege in the Private Equity World

Have you ever asked your lawyer, “If I copy you on an email, that makes it privileged, right?” You probably have, and you have also probably received different answers at different times, and probably never one that makes you feel good!  We ask that you don’t immediately blame your lawyer (even if it is not Weil).  The best answer is that whether an email or a communication is privileged depends on several factors, and there can be more than one blanket answer to the question.

The attorney-client privilege is an important exemption from discovery that allows clients to communicate and receive legal advice from their counsel. In today’s fast-paced business and legal environment, most communications occur by email and therefore can create a discoverable record.  That reality further increases the risk of putting something into an email.  While no business person (or corporate lawyer, for that matter) wants to spend time focusing on theoretical litigation, you should be armed with the knowledge to protect yourself, to the extent practically possible, and waive a significant protection (the attorney-client privilege) you own.

Here are several practical tips/considerations (maybe even “best practices”) to keep in mind to ensure you preserve and do not waive privilege when using email to communicate on legal and/or business matters. As always (you would be disappointed if there was not at least one disclaimer included), the specifics of any situation can change the calculus and ultimate answer on any privilege issue.

  1. Not every communication with a lawyer is privileged. The starting point is to understand that communications are privileged if they predominantly seek or provide advice that is legal rather than business in character. Ask yourself when writing an email if the communication is made in order to seek legal advice or services for you, the client.  You can help ensure a communication is privileged if you keep these things in mind.  Remember that courts more closely scrutinize communications between clients and in-house counsel than between clients and outside counsel.  Along those lines, mere participation of an in-house counsel in an email does not automatically protect it from disclosure or make it privileged.
  2. Good lawyers often provide more than legal advice but non-legal advice is often not protected by privilege. Accordingly, be mindful when seeking advice from your counsel in writing that you make clear you are asking for legal advice if that is what you are doing.  That will help eliminate any potential question down the road if a dispute arises and an adversary claims your communications are not privileged.
  3. Be mindful of when a private equity employee plays multiple roles. Private equity director designees should be trained on preserving privilege and the risks of waiver, including by sharing otherwise privileged information with other employees when serving on boards of portfolio companies. The privilege belongs to the company and not to the board member, so the board member should keep in mind that carelessly or casually sharing privileged information of a portfolio company with a fellow employee of the private equity firm can waive the privileged nature of the portfolio company’s communications.  When it comes to sharing privileged information, “less is more” and it is better to ask for guidance before, rather than after, sharing it.
  4. Have clear engagement letters with counsel, particularly when one firm represents PE firm and portfolio company. When one law firm represents two clients (typically the private equity firm and its portfolio company), the written engagement letters with outside counsel should be clear because there is not well-established case law applying joint client rules to the PE context (e.g. communications from a PE firm to portfolio company where they share counsel). In such a situation, one of the two clients cannot unilaterally waive the privilege belonging to the joint clients.  There are clearly times when joint representation makes sense, but thinking through the pros and cons is worthwhile.
  5. Privilege considerations with a merger. Clients often share a common legal interest in the merger context where parties represented by separate counsel merge and the merger agreement directs them to share privileged information. In that situation, courts generally have found that there is no waiver of privilege, and it is preserved.  HOWEVER, a recent New York decision found that there would be a waiver in the above situation unless the sharing was done in connection with pending or reasonably anticipated litigation.  States differ on whether litigation must be pending or reasonably anticipated in order for there to be a privilege post-merger.  The takeaway is to NOT assume the common interest privilege applies (particularly in light of the prevalence of merger related suits).  The common interest privilege may apply to communications between a PE firm and its investors regarding threatened or pending litigation or an investigation, but care should be given to the risk of waiver when a PE firm shares information with one or more of its limited partners.  Consideration should also be given to allowing a portfolio company to withhold privileged information from a PE firm in the absence of a shared privilege.
  6. Privilege issues with sales. When control of a company passes to new management (via sale, merger, etc.), the power to assert or waive the privilege passes to the new management. Where an acquiring company acquires a portfolio company from a PE firm and later sues the PE firm, the acquiring company may access and use in the suit the privileged information the PE firm and its former portfolio company jointly shared.  Therefore, care should be given to joint representation of a PE firm and its portfolio company so as to be mindful of the risks.  Consideration should be given to using separate counsel for sales/purchases to limit what is passed to new management.