For M&A Attys, A Warning On Inadvertent Disclosure
Law360, New York (June 15, 2016, 11:51 AM ET) -- On June 9, 2016, the New York Court of Appeals, New York’s highest court, rejected an attempt to expand the attorney-client privilege to communications between parties in a merger and acquisition context where the communications do not relate to pending or anticipated litigation.
Ordinarily, if attorney-client communications are shared with a third party, then the privilege that attached to those communications is waived. However, under the common interest doctrine (also known as the “common interest exception”), attorney-client communications disclosed to a third party that is separately represented by counsel will remain privileged if the third party shares a common legal interest with the client who made the communication and the communication is made in furtherance of that common legal interest. In Ambac Assurance Corp. v. Countrywide Home Loans Inc., the court held that such attorney-client communications will remain privileged only if the communications relate to pending or anticipated litigation, but not in the context of an M&A transaction or other commercial matter.
At issue in the case was whether defendant Bank of America Corp. was required to disclose certain of its communications with defendant Countrywide Financial Corp. made in 2008 during the period between the signing of its merger agreement with Countrywide and the closing of the merger. Plaintiff Ambac Assurance Corp., which guaranteed payments on certain residential mortgage-backed securities issued by Countrywide, claimed that Countrywide fraudulently misrepresented the quality of the underlying mortgage loans and that, as a result of the merger, Bank of America became Countrywide’s successor-in-interest and was responsible for Countrywide’s liabilities to Ambac.
During discovery, Bank of America withheld a series of emails with Countrywide on the basis that these communications were protected by the common interest exception to the attorney-client privilege because they pertained to legal issues that the two companies needed jointly to resolve in connection with completing the merger, such as public disclosures and regulatory approvals, and, as such, the defendants shared a common legal interest in the completion of the merger. By contrast, Ambac argued that the voluntary sharing of such confidential communications before the closing of the merger waived any attorney-client privilege because Bank of America’s and Countrywide’s common legal interest did not relate to pending or anticipated litigation, as required by pre-existing New York case law.
The divided 4-2 court agreed with Ambac and reversed the decision of the Appellate Division, First Department, which had found that the common-interest exception applied in the presence of a common legal interest among the parties, regardless of pending or anticipated litigation. Judge Eugene Pigott, in writing for the majority, noted that the litigation limitation has been the rule in New York for over two decades. In rejecting an expansion of the common interest exception to commercial transactions, the court noted that the interests of counterparties to a commercial transaction are not necessarily aligned to the same extent as those of co-defendants in a litigation, that Bank of America had failed to demonstrate that the sharing of confidential communications on a privileged basis was necessary in order for the parties to comply with their merger-related regulatory and public disclosure requirements, and that “any benefits that may attend such an expansion of the doctrine are outweighed by the substantial loss of relevant evidence, as well as the potential for abuse.”
Judge Jenny Rivera, in a dissent that was joined by Judge Michael Garcia, wrote that, because the attorney-client privilege itself is not tied to the presence of actual or threatened litigation and because clients often seek legal advice specifically in order to avoid litigation, the common interest exception to the privilege should have applied to this case. More specifically, she argued that, during the course of a transformational corporate transaction, separately represented parties should be able to exchange privileged and confidential information in order to better comply with their legal and regulatory requirements, thereby jointly producing more complete and accurate disclosure for their investors and regulators in relation to the transaction. The dissent further noted that the “better rule is grounded not in the rote application of a litigation requirement, but in the legal dynamics of a modern corporate transactional practice” and, accordingly, that New York law should follow the lead of the U.S. Courts of Appeals for the Second, Seventh, Ninth, and Federal circuits, and a “significant number of state jurisdictions” (as well as the Restatement (Third) of the Law Governing Lawyers), each of which has rejected or interpreted more narrowly the litigation requirement for the common interest doctrine to apply.
The period between the signing of a definitive merger agreement and the closing of the merger can be a frenzied time, in which the parties and their advisers must coordinate efforts on many active fronts, and the discipline and scrutiny that may be applied to the compilation of the initial due diligence materials may at times fall by the wayside. In the case of the Bank of America/Countrywide merger in 2008, the parties were required not only to prepare and file with the U.S. Securities and Exchange Commission a joint proxy statement and prospectus, but also to comply with the requirements of their respective regulators (the Office of the Comptroller of the Currency, the Federal Reserve Board and the Office of Thrift Supervision), all of which was transpiring in the context of Countrywide’s increasingly challenged financial condition and the looming crisis in the financial services sector.
While not all mergers will be as fraught with potential disclosure issues as the Bank of America/Countrywide deal, the Ambac decision provides a useful reminder to M&A practitioners that care must be taken to ensure that the mad dash to closing should be managed in such a way as to avoid the inadvertent waiver of the attorney-client privilege in relation to sensitive, confidential information. Parties may seek to include language in their nondisclosure agreements and/or in the preclosing covenants in their merger agreements that asserts a commonality of legal interest in the information to be provided thereunder. However, in the absence of pending or anticipated litigation, it is unlikely that such language would have the desired effect of preserving the attorney-client privilege under New York law as between separately represented parties. To the extent that parties to a merger or similar transaction may anticipate material regulatory or other compliance issues in connection with the closing of the transaction, the parties should consider jointly engaging one law firm to serve as special counsel for purposes of addressing any such issues. The Court of Appeals in its opinion in the Ambac case recognized that a joint client or co-client arrangement will preserve the privilege.
In any case, parties to M&A deals and their legal and financial advisers must be vigilant in the sharing of confidential information with their counterparties prior to closing and must resist the temptation to simply forward emails to one another that may constitute or include attorney-client privileged communications. Instead, the parties should carefully screen all information to be shared at each stage of a transaction, whether as part of an initial due diligence process or, after the signing of the transaction, pursuant to a post-signing access to information covenant, with a careful eye toward withholding or redacting any privileged information. In this manner, the parties can be afforded access to the underlying factual information that is required to be disclosed to the parties’ investors and regulators, while exercising greater care to avoid the inadvertent disclosure of any privileged information as part of any post-closing litigation that may ensue.
—By Stewart D. Aaron, Joshua Berick and Christian D. Cheslak, Arnold & Porter LLP
Stewart Aaron and Joshua Berick are partners and Christian Cheslak is an associate in Arnold & Porter's New York office.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
 Ambac Assur. Corp. v. Countrywide Home Loans Inc., No. 80, slip op. 04439 (N.Y. June 9, 2016).
 Chief Judge Janet DiFiore took no part in the opinion.