Learn about a court case where sharing privileged communications during due diligence led to a waiver of attorney-client privilege. Understand the implications for M&A transactions and the importance of maintaining a clear distinction between legal and commercial interests.
M&A Stories
January 7, 2021
Introduction:
When a buyer engages in due diligence during an acquisition, it’s crucial to be cautious about sharing privileged communications with the target company. This action can potentially lead to the waiver of attorney-client privilege, impacting the confidentiality of lawyer-client exchanges.
The Situation:
In a specific case, a beverage maker aimed to acquire a sports drink distributor through a merger. The deal involved a cash payment of $13.8 billion along with a 13% stake in the combined entity.
The Legal Dispute:
Following the merger’s completion, a significant competitor of the buyer terminated a distribution agreement that the target company had with them. The competitor argued that they were not liable for a significant termination fee due to a change of control under the distribution agreement. In response, the target filed a lawsuit against the competitor in Delaware’s Superior Court to recover the termination fee.
The issue arose when the competitor demanded access to certain communications between the buyer’s attorneys and the buyer, which had been shared with the target during the due diligence phase. These communications related to the change of ownership and termination fee provisions in the agreement between the competitor and the target. The target resisted the demand, claiming that the buyer hadn’t waived its attorney-client privilege by sharing these communications. The target argued that both parties had a shared legal interest in understanding and protecting the target’s rights under the distribution agreement.
The Court’s Ruling:
The central question was whether the act of sharing the buyer’s privileged communications with the target invalidated the confidential nature of the information and thus waived the privilege. While sharing privileged communications generally breaks their confidentiality, the ‘common interest doctrine’ recognizes that privilege isn’t forfeited when communications are shared between the buyer and target regarding a shared legal interest. For the privilege to hold, this shared legal interest must primarily revolve around legal issues rather than general commercial interests.
In this particular case, the court determined that the buyer had indeed waived the privilege. Despite input from both in-house and external counsel on the communications, the focus was on commercial matters, leading to the waiver.
This case is referred to as American Bottling Company v. Repole, C.A. No. N19C-03-048 AML CCLD, Superior Court of Delaware, (Submitted: May 1, 2020. Decided: May 12, 2020)
Conclusion:
This situation serves as a reminder that communications between a buyer and the target’s lawyers during due diligence might not enjoy the protection of attorney-client privilege. It highlights the importance of distinguishing between discussions based on legal matters and those centered around commercial interests.
By John McCauley: I help people manage M&A risks involving privately held companies.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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