Buyers doing due diligence in connection with merger and acquisition transactions typically request information about the seller’s contract rights, patent rights, and/or pending/threatened litigations. Often times, the most relevant and useful information the seller may have in this regard are documents that are subject to the attorney-client privilege. Can the seller provide documents to the would-be buyer that are covered by the attorney client privilege without waiving the privilege? The answer turns on whether there is a “common interest” between the buyer and seller. That, in turn, could depend on what law is applied.
Ordinarily, providing a privileged document to a third party waives the attorney client privilege. The common interest doctrine is an exception.1 Under the common interest doctrine, “[a] third party may be privy to the communication between an attorney and a client, without destroying the privilege, if the communication is made for the purpose of furthering a nearly identical legal interest shared by the client and the third party.”2 Absent the existence of a valid common interest, exchanging privileged documents with the buyer during due diligence will waive the privilege. Exchanging privileged documents, even following the execution of a merger agreement, will often not suffice to protect the privilege if third parties later seek the privileged information. Unlike some states, New York takes a fairly narrow view of the common interest privilege.
This article will explore relevant New York cases, including the recent decision in Ambac Assurance v. Countrywide Home Loans.3 These cases demonstrate the stringent limitations that New York courts place on the common interest privilege when asserted in the context of an M&A deal. Next, we will review and compare Delaware’s broader approach to the common interest privilege. Finally, in light of the fact that the applicable law could be outcome determinative, we will examine which state’s common interest privilege rules apply, and how parties may better shield the privilege through carefully drafted merger and sale agreements.
New York’s Narrow Approach
The Non-Merger Context. New York courts first recognized the common interest privilege in criminal cases only.4 Shortly thereafter, New York federal courts began extending the common interest privilege to the civil context, including patent actions5 and disputes relating to music licensing fees.6 In Johnson Electric North America v. Mabuchi North America, a New York federal court addressed whether privileged communications between a company and its lawyers can be shared with the company’s customer without waiver of the privilege (i.e., whether the “common interest” exception applies). The court began by noting that the federal courts have expanded the attorney-client privilege “to cover communications made by the client or his lawyer to a lawyer representing another in a matter of common interest.”7 The court held that plaintiff company and its customer shared a common interest because they were both facing a claim of patent infringement by the defendant. “Inevitably, as a matter of both litigation strategy and business necessity,” the two entities “were de facto allies.”8 Due to the strong common interest held by the plaintiff and its customer, the court held that the documents were properly withheld.9
Two years later, Aetna Casualty and Surety v. Certain Underwriters at Lloyd’s London,10 provided one of the first occasions for a New York state court to consider the applicability of the common interest privilege to civil cases.11 In extending the common interest privilege to civil litigation, the court held:
Any “common interest” privilege must be limited to communication between counsel and parties with respect to legal advice in pending or reasonably anticipated litigation in which the joint consulting parties have a common legal interest.12
The court reasoned that a “common legal interest” was required because the attorney client privilege “may not be used to protect communications that are business oriented or are of a personal nature.”13
In so holding, the court defined “common legal interest” fairly narrowly. Under this approach, the common legal interest must “impact potential litigation against all of the participants.”14 Moreover, the court noted:
It is well settled that the mere existence of the cooperation agreements signed by the [parties] cannot create a privilege that otherwise does not exist. A private agreement by the parties to protect communications cannot create a privilege.15
Thus, Aetna creates a narrow common interest privilege that cannot be bolstered by the mere existence of common interest agreements.
‘Ambac’: The Mergers and Acquisition Context. The limited Aetna standard was recently applied by a New York state court to the mergers and acquisitions context. In Ambac, the court addressed whether the common interest privilege applied to communications between Bank of America and Countrywide after they had signed an agreement for the merger of Countrywide and a Bank of America subsidiary, but before the merger was completed.16 Bank of America opposed plaintiff’s discovery requests relating to the merger, alleging that “in the initial stages of becoming a parent and subsidiary [Bank of America] and Countrywide shared a common legal interest in closing the merger and the many intermediate steps for two heavily regulated entities.”17 The plaintiff rejected Bank of America’s contentions, asserting that the common interest privilege did not apply because the communications were shared between two companies engaged in a business transaction.18
The matter was first referred to a special referee. Adopting the reasoning set forth in Aetna, the special referee held:
Any “common interest” privilege must be limited to communication between counsel and parties with respect to legal advice in pending or reasonably anticipated litigation in which the joint consulting parties have a common legal interest.19
The special referee further held that this standard is the only relevant inquiry and, thus, “the question of whether the merger agreement had been entered into does not have significance.”20 The court noted that many of the documents listed on Bank of America’s privilege log, such as SEC disclosures or negotiations of employee benefits, did not seem “to involve pending or reasonably anticipated litigation.”21 The parties were ordered to review the documents at issue in light of this holding.22
Bank of America’s subsequent motion to vacate this ruling was denied.23 In so holding, Judge Eileen Bransten noted that no New York case has ever expanded “the common interest doctrine in the context of a signed, but not yet completed, merger agreement.”24 Bransten further noted that the defendant failed “to cite any New York case that applied the common interest doctrine outside of either joint-representation of two parties by one attorney, or where parties reasonably anticipated litigation.”25 She concluded that “New York law does not allow a privilege claim under the common-interest doctrine unless there is pending or reasonably anticipated litigation.”26
Bank of America has appealed this decision to the Appellate Division, First Department. On appeal, Bank of America reasserts its contention that New York courts applying the common interest privilege should reject the “pending or reasonably anticipated litigation” requirement. Bank of America reasons that the common interest privilege is an extension of the attorney-client privilege to communications with a third party and, thus, it should be applied to any situation to which the underlying protection applies, as long as the parties share a common legal interest. Bank of America further argues that communications made in furtherance of a signed merger agreement constitute a common legal interest protected by the common interest privilege. If Bank of America’s view is accepted on appeal, it will bring New York more in line with Delaware and other jurisdictions as it relates to the common interest privilege.
Under Aetna and Ambac as they now stand, however, New York’s common interest privilege arguably applies in the merger context only where: (1) the communication would have been protected by the attorney-client privilege, absent disclosure to a third party; (2) the buyer and seller share a common legal interest; and (3) the common legal interest impacts pending or reasonably anticipated litigation against both the buyer and seller.27 Absent a successful appeal in Ambac, therefore, it would appear that the New York common interest privilege will be applied in a merger context, if at all, in only the most limited circumstances. If a would-be buyer reviewed documents to determine if it wanted to proceed with the contemplated transaction, its purpose would likely be deemed “business” not “legal,” even though it relates to a legal matter. Common interest agreements may provide little assistance to parties attempting to shield communications from discovery as these agreements appear to hold little weight with New York courts.
Delaware’s Broader Approach
In comparison to New York, Delaware applies the common interest privilege in transactional settings far more broadly.28 While Delaware courts also require the shared communications to be exchanged by parties that share a “legal,” as opposed to commercial, interest, a party invoking the common interest privilege does not need to be subject to “pending or reasonably anticipated litigation.” In the transactional setting, Delaware courts have defined common interest “as an interest ‘so parallel and non-adverse that, at least with respect to the transaction involved, [the two parties] may be regarded as acting as joint venturers.’”29
In Jedwab v. MGM Grand Hotels, the Delaware Court of Chancery recognized the potential applicability of the common interest privilege in the merger context.30 There, the plaintiffs sought to enjoin a proposed merger between MGM Grand Hotels and Bally Manufacturing Corporation.31 During the course of discovery, plaintiffs sought to compel the production of certain documents. This raised the question of whether the common interest privilege applied to documents prepared by an attorney for one party to a proposed merger transaction and provided to the other party to the transaction.32 The court held that the common interest privilege was not applicable because the parties had adverse interests in negotiating the merger.33
The subsequent decision in 3Com, however, demonstrates that the door remains open to the application of the common interest privilege in the merger context. In 3Com, Newco was planning to acquire 3Com.34 Another company, Huawei, agreed to take a 16.5 percent interest in the acquisition.35 In response to discovery requests, Newco asserted that it shared a common interest with Huawei in pursuing the merger. The court acknowledged that the entities “appear[ed] to have a common interest” in the merger, but noted that the companies had adverse interests in negotiating their merger agreement.36 Due to this potentially conflicted relationship, the court ordered an in camera review of the disputed documents to determine the companies’ relationship when the challenged communications were made.37 The court held that if, following an in camera review, it was clear that “the parties were in common interest with respect to the matters addressed, the communication will remain privileged.”38
Which State’s Law Governs in M&A Deals?
As a preliminary matter, parties involved in a deal must determine which state’s privilege laws will govern their transaction. Both New York and Delaware have adopted the “most significant relationship” test set forth in the Restatement (Second) of Conflict of Laws §139 (1971), which provides that the law of the state with the most significant relationship to the communication will apply, even if it is different from the forum state’s privilege law.39 However, before even reaching the most significant relationship test set forth in Restatement (Second) of Conflict of Laws §139, New York and Delaware courts will enforce a choice of law clause contained in a merger agreement.40 Therefore, parties entering into a merger agreement should include a choice of law provision to override the application of Restatement (Second) of Conflict of Laws §139 and ensure applicability of the law selected by the parties.
New York dealmakers should proceed with caution before exchanging privileged communications, as invoking the common interest privilege may prove difficult. Parties may better protect themselves by selecting Delaware law to govern their merger agreement. However, even after selecting Delaware law, parties must carefully consider whether the primary motivation for sharing the confidential communication is legal or commercial. Only then will a dealmaker’s communications be shielded by the common interest privilege.
John J. Calandra is a partner, and Sandra B. Saunders is an associate, at McDermott Will & Emery in New York. Mr. Calandra heads the firm’s New York trial practice group.
1. Ambac Assurance v. Countrywide Home Loans, 41 Misc. LEXIS 3d 1213(A), at *1 (Sup. Ct. N.Y. Co. Oct. 16, 2013).
3. Ambac Assurance v. Countrywide Home Loans, No. 651612/2010, 2013 N.Y. Misc. LEXIS 4759, at *7 (Sup. Ct. N.Y. Co. June 24, 2013), aff’d, 41 Misc. LEXIS 3d 1213(A) (Sup. Ct. N.Y. Co. Oct. 16, 2013).
4. See, e.g., People v. Pennachio, 167 Misc. 2d 114, 115 (Sup. Ct. Kings Co. 1995); United States v. Schwimmer, 892 F.2d 237, 244 (2d Cir. 1989).
5. Johnson Elec. N. Am. v. Mabuchi N. Am., No. 88 Civ. 7377, 1996 U.S. Dist. LEXIS 5227 (S.D.N.Y. April 19, 1996).
6. United States v. ASCAP, No. 13-95, 1996 U.S. Dist. LEXIS 16201 (S.D.N.Y. Nov. 1, 1996).
7. Id. at *8.
8. Id. at *10.
9. Id. at *20-21.
10. Aetna Casualty and Surety v. Certain Underwriters at Lloyd’s London, 176 Misc.2d 605, 611 (Sup. Ct. N.Y. Co. 1998), aff’d, 263 A.D.2d 367 (1st Dep’t 1999). Aetna Casualty and Surety is a subsidiary of Travelers.
11. See Parisi v. Leppard, 172 Misc.2d 951, 956 (Sup. Ct. Nassau Co. 1997) (extending common interest privilege to civil cases because parties should be able to attend a litigation strategy meeting “without fear that the full contents of the meeting will later be available to a potential adversary.”).
12. Aetna, 176 Misc.2d at 612.
13. Id. (emphasis added).
14. Id. at 612-13 (emphasis added).
15. Id. at 613 (emphasis added).
16. Ambac, 2013 N.Y. Misc. LEXIS 4759, at *1-2.
17. Id. at *2.
19. Id. at *7 (emphasis added).
20. Id. at *8.
23. Ambac, 2013 N.Y. Misc. LEXIS 4570 at *6.
24. Id. at *3.
25. Id. at *3.
26. Id. at *6.
27. Aetna, 176 Misc.2d at 613; Ambac, 2013 N.Y. Misc. LEXIS 4759, at *8.
28. Delaware has codified the common interest privilege. See Delaware Uniform Rule of Evidence 502(b)(3).
29. 3Com v. Diamond II Holdings, No. 3933-VCN, 2010 Del. Ch. LEXIS 126, at *32 (Del. Ch. May 31, 2010) (quoting Jedwab v. MGM Grand Hotels, No. 8077, 1986 Del. Ch. LEXIS 383, at *5 (Del. Ch. March 20, 1986)).
30. Jedwab, 1986 Del. Ch. LEXIS 383, at *2.
31. Id. at *1.
32. Id. at *2.
33. Id. at *5-6.
34. 3Com, 2010 Del. Ch. LEXIS 126, at *31.
36. Id. at *32.
37. Id. at *33.
39. See 3Com, 2010 Del. Ch. LEXIS 126, at *17; Mazzella v. Philadelphia Newspapers, 479 F. Supp. 523, 527 (S.D.N.Y. 1979); Delta Fin. v. Morrison, 831 N.Y.S.2d 352 (Sup. Ct. Nassau Co. 2006).
40. 3Com, 2010 Del. Ch. LEXIS 126, at *20 (declining to apply most significant relationship test because parties’ agreement specified Delaware law); Bausch & Lomb v. CIBA Vision, No. 07 CV 6575, 2008 U.S. Dist. LEXIS 73598 (W.D.N.Y. Sept. 17, 2008) (applying Delaware law, as required by parties’ common interest agreement).