Consider this scenario: During routine due diligence for an impending transaction, the acquiring company learns that the business it is trying to buy has received a grand jury subpoena and is now conducting an internal investigation. Before the buyer will proceed further, it requests detailed follow up due diligence. The seller would like to provide the requested information so that it can sell the business. But some of what the buyer wants to know and the seller wants to share is protected by the attorney-client privilege. Concerns about waiving the privilege by sharing that information are creating an obstacle to closing the deal.
This is a familiar scenario in corporate transactions, especially in heavily regulated industries where government investigations are commonplace. The ultimate owner of the business will want to ensure that attorney-client communications remain privileged if litigation ensues. But sharing such materials during due diligence could result in waiver of the privilege and, ultimately, to the materials being used against the business in subsequent litigation.
Do the parties have any option, short of waiving privilege or walking away from the deal? One solution may be to share the privileged information in a way that allows the parties to successfully assert the common interest doctrine.
The Common Interest Doctrine
The common interest doctrine is sometimes referred to as a privilege, but it is really an exception to the rule that sharing privileged communications with a third party results in waiver of the privilege. For the doctrine to apply, the parties must have common interests that are legal, not just commercial, and most courts require that the interests be identical, not just similar. The doctrine typically applies to co-parties in litigation. It has also been applied in the context of a commercial transaction—where the parties sharing the privileged information are on opposite sides of the negotiating table—although application in that context is not guaranteed. Whether a court would apply it in the transactional context depends on a number of factors, including the timing of the communications, the nature of the transaction, the jurisdiction in which the waiver issue is litigated and the steps taken to maintain the confidentiality of the information.
There are strong policy reasons for applying the common interest doctrine in this context. As one federal court explained, “courts should not create procedural doctrine that restricts communications between buyers and sellers, erects barriers to business deals, and increases the risk that prospective buyers will not have access to important information that could play key roles in assessing the value of the business or product that they are considering buying. Legal doctrine that impedes frank communication between buyers and sellers also sets the stage for more lawsuits, as buyers and sellers are more likely to be unpleasantly surprised by what they receive.” Hewlett-Packard Co. v. Bausch & Lomb, Inc. (N.D. Cal. 1987). However, most courts do not take such an expansive view, cautioning that because the attorney-client privilege is an obstacle to the search for the truth, it should be narrowly construed consistent with the purpose of the privilege: securing confidential legal advice.
