Understanding and maintaining the attorney-client privilege in transactions and general corporate advice Amy E. Tankersley January 26, 2017

Overview of Attorney-Client Privilege Who Is the Client? Introduction Overview of Attorney-Client Privilege Who Is the Client? The Common Interest Doctrine Advisors & Consultants Affiliated Entities Mergers & Acquisitions Work Product Doctrine Best Practices to Preserve Privilege

Overview of attorney-client privilege

Overview of attorney-client privilege The attorney-client privilege protects certain communications from the obligation to provide them to your adversary in a lawsuit. Preserving privilege matters for all attorneys because the transaction or other matter you are working on may become part of a lawsuit one day.

Overview of attorney-client privilege The attorney-client privilege protects: A communication, Made between privileged persons (i.e., attorney, client or agent), In confidence, For the purpose of obtaining or providing legal assistance for the client. Construed narrowly!

Overview of attorney-client privilege The communication must be made for the purpose of obtaining legal advice, rather than business or other advice. Most courts apply the “predominant purpose” test. One court recently applied a “one of the significant purposes” test. There must be an expectation that the communication will remain confidential.

Overview of attorney-client privilege Merely having a lawyer present during the communication is not enough. Merely sending a document to a lawyer does not make it privileged. Seeking or giving non-legal advice is not privileged.

Overview of attorney-client privilege waiver The privilege is waived by disclosing the substance of the communication to a third party. Disclosing privileged information to a representative of the client or attorney does not waive the privilege. See detailed discussion below regarding who is considered a representative of the client. Disclosing that you have a lawyer or received advice on a particular issue does not waive the privilege.

Who is the client?

When an entity is the client, one issue that often arises is: Who is the client? general issue When an entity is the client, one issue that often arises is: Who can speak on behalf of an entity to an attorney and have their communications protected under the privilege?

Who is the client? federal law Originally, federal law imposed a strict “control group” test to determine who within a client entity was considered within the privileged relationship. Generally extended only to those people high enough in the organization who received advice on behalf of the corporation and could act on that legal advice. In 1981, the Supreme Court replaced the “control group” test with a new “subject matter” test. Upjohn Co. v. United States, 449 U.S. 383 (1981). The person making the communication must have been an employee of the corporation; The communication must have been made at the direction of a corporate superior for lower-level employees; and The communication must have been within the scope of the employee’s duties.

Who is the client? texas law Texas law includes both the control group test and subject matter test by defining “client’s representative” as: A person who has authority to obtain professional legal services for the client or to act for the client on the legal advice rendered (i.e. control group test); or Any other person who, to facilitate the rendition of professional legal services to the client, makes or receives a confidential communication while acting in the scope of employment for the client (i.e. subject matter test). This means that in order to be included within the privilege under Texas law, the person must be either: Authorized to obtain professional legal services for the client; Authorized to act for the client on the legal advice rendered; or Acting within the scope of employment and is facilitating the rendition of professional legal services to the client.

The Common Interest doctrine

The common interest doctrine Texas State and federal law Texas recognizes only an “allied litigant privilege” rather than a broader “common interest” privilege. Texas courts require that there be pending litigation. Tex. R. Evid. 503 provides that privilege exists over communications made “by the client or a representative of the client, or the client’s lawyer or a representative of the lawyer, to a lawyer or representative of a lawyer representing another party in a pending action and concerning a matter of common interest therein.” The Fifth Circuit requires either actual litigation or a palpable threat of litigation at the time of the communication. In re Santa Fe Int’l Corp., 272 F.3d 705, 710-11 (5th Cir. 2001).

The common interest doctrine Notes on Other jurisdictions Delaware does not require there to be pending or anticipated litigation. Del. R. Evid. 502(b)(3). The Second Circuit has held explicitly that there does not need to be anticipated litigation. The Ninth Circuit imposes the additional requirement of the communication being made in accordance with some form of agreement, whether written or unwritten. California has a broad privilege encompassing all those who are present to further the interest of the client in the consultation or those to whom disclosure is reasonably necessary.

Advisors & consultants

Advisors & consultants Federal law The Eighth Circuit created a “functional equivalent” test for determining whether consultants of the client should be included within the privileged relationship: A third party who is the “functional equivalent” of an employee of the company can be within the privilege. The third party must have a significant relationship to both the client and the transaction at issue. The Fifth Circuit has not expressly adopted the “functional equivalent” test. However, a bankruptcy court in the Northern District of Texas has adopted this test, along with many other jurisdictions.

Advisors & consultants Texas law Instead of the “functional equivalent” test, the only parties included within the privilege as a client representative under Texas law are those who meet the definition of client representative. See slide 11. There is very little caselaw applying this standard to consultants and advisors, so be cautious! In one case, a Texas court held that because a person was hired by the trustee and given authority to obtain and act on legal advice on behalf of the trustee, he was within the privileged relationship between the trustee and the trustee’s attorney. In re Segner, 441 S.W. 3d 409 (Tex. App.—Dallas 2013).

Advisors & consultants what this means in practice If the person is an actual employee, ensure that the person is: Acting within the scope of his employment when communicating privileged information; and Actually facilitating the rendition of legal services to the client entity. If the person is not an actual employee, be cautious. Communications may be considered privileged if the person is: Authorized to obtain legal services for the client; or Authorized to act on legal advice for the client.

Affiliated entities

Courts rely on various methods to reach this result: Affiliated entities Issue – does the privilege extend to communications with a company client’s parent, subsidiary, or other affiliated entities? The law is not well developed but courts often look for ways to apply privilege for affiliated entities that show sufficient interrelatedness. Courts rely on various methods to reach this result: “Common interest” between entities The affiliated entities are joint clients of the same attorney General principles of common ownership or control

Questions courts frequently analyze: Affiliated entities Questions courts frequently analyze: How closely interrelated are the two entities? Are there potential adverse interests for the specific issue? What is the structure of the legal department and typical division of legal services? When affiliated entities’ interests are not aligned, courts typically hold there is no privilege. Recent case in federal court in Texas held that privilege protected communications between a parent company’s in-house counsel and management personnel of an indirect subsidiary under the joint client doctrine. Nester v. Textron, Inc., 2015 WL 1020673 (W.D. Tex. Mar. 9, 2015).

Affiliated entities Confirm there are no conflicts between the entities – if there are, each entity should have its own counsel. It needs to be clear who the attorney is representing – one company or the other, the joint venture, etc. Analyze which entities are included within the privilege prior to providing the legal advice.

Mergers & acquisitions

Determining type of sale Whether privilege passes to the new company depends on whether the transaction is considered the sale of an asset or the transfer of control. Texas “practical consequences rule”: if the practical consequences of the transaction result in a transfer of control of the business and continuation of the business under new management, then transaction is a transfer of control. Some jurisdictions apply a bright-line rule: if only an asset is sold, then it is an asset sale; if the entire company is sold, then it is a transfer of control.

Determining whether privilege passes Generally, when a transfer of control occurs, the attorney-client privilege passes to the new entity. Courts applying this rule generally hold that privileged communications regarding the transaction itself do not pass to the successor entity. Research this point in the applicable jurisdiction! When an asset is sold, the privilege does not pass to the purchaser. These rules may be modified by contract. When drafting transaction documents, think about whether you want to negotiate the transfer of attorney-client privilege.

Work product doctrine

Work product doctrine Overview The work product doctrine is separate from the attorney-client privilege. It protects material prepared and mental impressions developed in anticipation of litigation.

“In anticipation of litigation” has two prongs: Work product doctrine In anticipation of litigation “In anticipation of litigation” has two prongs: Objective: Whether a reasonable person, based on the circumstances, would have anticipated litigation (substantial chance of litigation). Subjective: The party invoking the protection must have had a good faith belief that litigation would ensue. A document is not work product if it is prepared in the ordinary course of business.

Work product doctrine waiver Work product protection is not as easily waived as attorney-client privilege protection. Work product can be disclosed to third parties without waiver as long as it does not increase the likelihood of an adversary obtaining the information.

Best practices to preserve privilege

best practices to preserve privilege Clearly identify privileged material as privileged. When in doubt, do not forward an email or memo. Start new email chains when adding people to the conversation. When taking notes of phone calls, clearly identify the conversation as privileged and note the attendees. Only include those people who are necessary to the communication. Research specific privilege issues as they arise or ask for advice from someone knowledgeable in this area.

Things to keep in mind Even if you claim a document is privileged, it will go on a privilege log—this means the other side will see the to, from, cc, subject line, and date. Judge may review the documents in camera to determine whether they are actually privileged. Privilege is a very gray area with little caselaw, so always err on the side of excluding people and not putting things in writing.

Speaker profile Amy E. Tankersley, Senior Associate atankersley@velaw.com • +1.214.220.7817 Amy focuses her litigation practice on state and federal securities litigation, officer and director liability, internal investigations, and class actions. She has successfully defended public companies, investment banks, and executives in suits filed by shareholders.