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April 30, 2012 Articles

Reviewing Privilege Issues During Transaction Negotiations

You never know when a deal is going to lead to litigation, so parties should be as protective during negotiations as they might be during litigation

by Scott B. Murray

Almost every litigator has been asked at some point to handle a business litigation case involving operative documents that neither the litigator nor his or her firm was involved in drafting. In such situations, the litigator often finds that the client's case could have been stronger if certain contract provisions or transactional documents had been drafted with a keener eye toward future litigation that might develop. Because of this common experience, many litigators work with their firms' transactional teams during the negotiation of transactions to assist with drafting contract and other transactional language that might benefit their clients in future litigation.

However, how often are litigators or attorneys well-versed in privilege issues asked to assist transaction teams for the express purpose of limiting the disclosure or exchange of privileged information during due diligence and the extensive negotiations that often occur between the parties, especially in complex transactions? Given that the parties to a proposed transaction are often more concerned with obtaining and reviewing the information necessary to analyze and structure the deal than they are with thinking about how the disclosure of privileged information might be used against them in a future lawsuit, it is often difficult to convince the businesspeople that such privilege issues are a significant concern. This is especially true when counsel is preventing the exchange or disclosure of information that the parties believe is needed to overcome a negotiating hurdle. Even if your answer to the question of involving a litigator or other attorney to manage and supervise privilege issues is "Often" or "Always," a recent Illinois Appellate Court decision highlights why parties to a transaction should rigorously analyze the need to disclose or exchange privileged information during due diligence and negotiations to avoid or limit the unintentional waiver of privilege protections. Although the case has been appealed to the Illinois Supreme Court, which may have already issued a decision by the date this article is published, the Illinois Appellate Court's ruling nonetheless highlights the need for transacting parties to consider carefully the disclosure and exchange of privileged information.

Center Partners, Ltd. v. Growth Head GP, LLC
In Center Partners, Ltd. v. Growth Head GP, LLC, 957 N.E.2d 496 (Ill. App. Ct. 2011), the Illinois Appellate Court upheld a lower court's order requiring the production of documents that had been withheld as privileged by the defendants. The underlying facts can be summarized relatively briefly. Three separate groups of entities were negotiating together to purchase the various assets of a fourth entity. The three groups were also communicating and negotiating among themselves regarding the acquisition, and during these communications and negotiations, they shared with one another legal advice regarding the acquisition that they each had received from their respective legal counsel. Moreover, in addition to the purchase agreement that the three groups entered into with the fourth entity, the three groups entered into a separate joint purchase agreement among themselves, regarding the allocation of the various assets and the purchase price each would pay, and, simultaneously with the closing of the purchase, another agreement regarding control of one of the entities among the assets they had purchased. Subsequently, minority limited partners of a sub-entity that was subject to the control agreement brought suit against the three acquiring groups, alleging breach of fiduciary duty and other contractual duties arising from the purchase.

The plaintiffs won a motion to compel the production of attorney-client communications that had been disclosed between the three groups during negotiations. They subsequently filed a motion to compel the production of all attorney-client communications between each of the acquiring groups and their respective counsel—even those not disclosed to another group—based on a subject-matter waiver argument. This would entail the production of over 1,500 documents identified on the defendants' privilege logs. The lower court granted the motion following an in camera review of some of the documents, and after the lower court denied a motion for reconsideration, certain of the defendants appealed.

The Illinois Appellate Court Ruling
The appellate decision, affirming the lower court ruling requiring the production of the privileged documents, includes several sweeping statements regarding subject-matter waiver under Illinois law:

  • "Notwithstanding the application of the privilege, the privilege can be waived by the client when the client voluntarily discloses the privileged information to a third party. The scope of the waiver extends to all communications relating to the same subject."

  • "Defendants disclosed among one another their attorneys' position on specific terms of the transaction and the structure for allocating control . . . as well as various written documents containing privileged attorney-client communications. These disclosed communications and documents are clearly waived, and the scope of the waiver extends to all communications relating to the same subject matter, i.e., the purchase . . . ."

  • "[W]e find no reason to distinguish between a waiver occurring during the course of litigation or during a business negotiation. Once the privileged communication is disclosed to a third party, the privilege is waived, and the scope of the waiver extends to all communications relating to the same subject matter."

  • "Further, to clarify, we do not hold that disclosure of certain privileged communication during negotiations nullifies all privileged communication and information as related to a particular business transaction, but, rather and specifically, as related only to the subject matter of the privilege that is already waived."

957 N.E.2d at 501–3 (emphasis in original).

In reaching its decision, the court stated that the attorney-client privilege is to be "construed 'within its narrowest possible limits[,]'" based on Illinois's "'strong policy of encouraging disclosure, with an eye toward ascertaining that truth which is essential to the proper disposition of a lawsuit.'" Id. at 501 (quoting Waste Mgmt., Inc. v. Int'l Surplus Lines Ins. Co., 144 Ill. 2d 178, 190, 579 N.E.2d 322 (1991)).

These broad statements are the focus of an amicus brief—filed by the Illinois State Bar Association, Association of Corporate Counsel, and Association of Corporate Counsel Chicago Chapter— arguing that the court's decision is incorrect. However, regardless of the outcome of the case before the Illinois Supreme Court, and even granted that courts in other states may be more protective of privileged information than the Illinois Appellate Court was in its decision, transacting parties and their counsel should take certain practical guidance from the Appellate Court ruling.

Negotiation, Like Litigation, Raises Privilege Concerns
Companies involved in negotiating transactions are often very cautious about disclosing or exchanging privileged information with the party on the other side of the table. This is only natural because the other party is often considered an adversary in connection with the negotiation of the terms and conditions of the deal. Even when the transaction is a friendly one, each company is still attempting to negotiate the best terms and conditions for its interests and is usually careful to safeguard privileged communications with its counsel, which might reveal its business objectives and goals for the transaction. Therefore, it is not often a challenge to convince companies to avoid disclosure of privileged information to the party across the negotiating table.

However, when companies are working together in a transaction on the same side of the table, their joint interests in the structure and terms of the deal may alter their normal inclination to be guarded with privileged information. In such situations, the businesspeople may consider themselves to be jointly negotiating the deal and may feel that because their companies' interests are aligned, there is less concern about exchanging privileged information. Moreover, regardless of the alignment of the parties, if the issues are complex and the financial stakes substantial, there is often even more pressure for the parties to disclose and exchange information, including privileged information, that will assist the businesspeople in understanding any roadblocks or hurdles that have developed during the negotiations. Counsel is often called upon in such situations to find solutions to help the businesspeople obtain and review the information deemed necessary to resolve the issue, especially if the problematic issue is a legal one raised by counsel.

In such situations, it may be important to have a litigator or other attorney who is tasked with spotting and analyzing privilege issues as part of the transaction team. One reasonable interpretation of Center Partners is that companies should avoid viewing the negotiation of a transaction differently than litigation. During litigation, clients and their counsel are especially focused on privilege issues to avoid disclosing their litigation strategy or facts about the case that have been disclosed in confidence, as both are considered integral to the outcome of the litigation. However, in negotiating a transaction, such concerns regarding protecting privileges recede. The terms and the conditions of the deal are the parties' primary focus, and the discussion of various legal considerations and how they effect the terms and conditions being negotiated are considered means to consummating the deal that should not (and often must not) stand in the way of negotiations.

The Privilege Manager
Therefore, the appointment of a litigator or other attorney focused on privilege issues as "privilege manager" may be useful to avoid or limit the disclosure and exchange of privileged information to reduce the risk of a waiver argument being asserted by future litigants seeking to obtain the privileged information and use it against the disclosing party. This privilege manager should be well versed in privilege issues, especially any state-specific privilege case law that might apply to the transaction. The privilege manager should be part of the transaction team from the start of negotiations and made aware of any potential issues that may be the focus of legal advice or opinions communicated to the client or the subject of attorney work product.

The privilege manager should be asked to consider the potential risks of disclosing or exchanging a variety of privileged information and, as necessary, to develop alternative means for the parties to negotiate the terms and conditions of the transaction without disclosing or exchanging privileged information or drafting an agreement between the transacting parties governing the protection of privileged information to be disclosed between the parties. Such agreements, sometimes labeled "common interest agreements," state the parties' reasons for the disclosure of privileged information and their agreement that such disclosure either does not evidence the disclosing party's waiver of any applicable privilege (i.e., in anticipation of future litigation) or represents only a limited waiver of any applicable privilege for the communications or documents exchanged and not a subject-matter waiver. Of course, the effectiveness of such agreements to defeat any future waiver arguments will depend on the governing law applied to the agreement by the court ultimately reviewing the agreement.

Before any privileged information is shared with third parties, including parties on the same side of the negotiating table, the privilege manager should be asked to consider ways to limit or eliminate the need to disclose or exchange such privileged information, or limit the disclosure or exchange so as to reduce the scope of any potential subject-matter waiver arguments. The privilege manager will therefore be asked to balance the immediate interest in assisting the parties' negotiations with the long-term concern of exposing privileged information to production in future litigation. The balance may often fall on the side of disclosure or exchange, but the analysis will help the parties craft the best solution for the disclosure or exchange.

You never know with any certainty when a deal or business relationship is going to lead to litigation. From the outset of negotiations, parties should consider how to best position themselves for any foreseeable future litigation. The Center Partners case reminds us that the protection of privileged information during due diligence and negotiations is also a significant consideration for the parties. Litigation counsel are often looking for ways to obtain access to privileged communications in the search for evidence to support their clients' claims or defenses. Therefore, transacting parties should carefully consider being as vigilant in protecting privileged information during negotiations as they otherwise might be during litigation.

Keywords: litigation, commercial, business, transaction negotiations, privilege, Illinois

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