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Attorney-Client Privilege – A Public Company Gotcha

    Client Alerts
  • January 26, 2012

Attorney-client privilege, the oldest common law evidentiary privilege for confidential communications, allows a client to confide in his attorney all facts regarding a matter without fear that his communications will be used against him. Armed with all of the facts, the attorney can appropriately assess the merits of the client’s legal position and act as an effective advocate. The privilege also addresses broader public policy concerns because reasoned legal counsel arising from frank communication will enable the client to voluntarily conform its conduct within acceptable legal boundaries. 

But the attorney-client privilege is not without drawbacks. Seen in another light as a tool for the suppression of evidence, courts frequently say that the privilege is to be strictly construed. It is fair to say that the competing policy considerations embodied in the attorney-client privilege have made courts more than a little ambivalent on the subject.

Elements of Privilege

Before we get to the “gotcha,” it is useful to remember the key elements of privilege, each of which must be demonstrated to the court’s satisfaction by the party seeking the protection of the privilege.

Communication.  Attorney-client privilege protects only communications, not facts.

Between Privileged Parties.  To be protected, a communication must occur between a client and its attorneys, or qualified agents of the attorneys. The majority rule (followed by the Fourth Circuit and North Carolina) is that the privilege attaches to communications with any employees or agents of the entity regarding matters within the scope of their duties, so long as the other elements are present. The minority view is that the privilege attaches only to communications with those employees of a company who can obtain legal services and have the authority to act on rendered legal advice. 
To Obtain or Provide Legal Advice.  The privilege protects only communications made within the scope and course of an actual attorney-client relationship and does not cover ordinary business advice, even if rendered by an attorney. In practice, there is a presumption that communications with outside counsel are for the purpose of legal advice, while in-house communications are more closely scrutinized.

Made in Confidence.  The attorney-client privilege protects only communications made in confidence (that is, only communications that the client expressly makes confidential or that the client could reasonably assume would be understood by the attorney as to be kept confidential). To be privileged, the client must intend that the attorney maintain the confidentiality of the communication. A communication that the client intends or expects the lawyer to pass on to a third party will not be protected.

Not Subject to Waiver by Client.  The privilege may be waived by any disclosure, even unintentional, of the confidential communication to persons who are not privileged parties. The general rule is that a privilege that has been waived is irrevocably surrendered for all purposes. 

Not Falling within Recognized Exceptions.  For example, attorney-client communications made to further intentional criminal or fraudulent conduct, or certain other wrongful acts, are not protected.

So, Where is the Gotcha?

The problem arises in connection with the “made in confidence” element of attorney-client privilege and specifically when the “intent to maintain confidentiality” test of that element is applied to attorney-client communications involving acquisitions, securities offerings and other corporate transactions involving public companies. Such communications frequently have as their subject the content of the merger agreement, prospectus or other document evidencing the transaction, and it is almost always the case that the subject document is intended to be shared with one or more non-privileged third parties. In particular, many such documents are ultimately filed, or described in filings, with the Securities and Exchange Commission. 
Under these circumstances, to what extent will the attorney-client communications, evidenced by correspondence, attorney notes and preliminary internal drafts of documents, be entitled to the protection of the privilege? Put another way, what inference may be drawn, as to the client’s intent to maintain the secrecy of attorney communications, from the fact that the client expected that the documents that are the subject matter of the communications would be revealed to third parties? 
In some jurisdictions, including the Fourth Circuit, when information is communicated in connection with the content of a document that eventually becomes public, neither the information nor the underlying details (including preliminary drafts, attorney notes and any other material necessary to prepare the document) will enjoy the privilege. Recent federal court decisions in other jurisdictions have taken the contrary, perhaps more logical, position that when a client seeks legal advice to ensure that documents comply with the federal securities laws, the privilege may continue to protect earlier drafts of public documents. Nevertheless, the Fourth Circuit’s narrow view of privilege, which it first articulated in the mid-1980s, remains problematic and should guide conduct and expectations. A brief summary of the Fourth Circuit cases is provided below.

In In re Grand Jury Proceedings, 727 F.2d 1352 (4th Cir. 1984), the court held that “if a client communicates information to his attorney with the understanding that the information will be revealed to others, that information as well as the details underlying the data to be published will not enjoy the privilege.” This case involved the investigation of a coal lease tax shelter promotion, in which the subpoenaed attorney had been engaged to prepare a prospectus, which was never actually published or circulated to investors. In upholding the lower court’s order that the attorney testify regarding his conversations with his clients, the court pointed to the fact that the information given to the attorney was not intended to be kept confidential, but was instead intended to be published. While the court’s reasoning was not clear, the court seemed to rule that because the clients did not intend to keep facts confidential, they must not have intended to keep their communications confidential either.

In a subsequent case, United States v. (Under Seal), 748 F.2d 871 (4th Cir. 1984), the magnitude of this holding was made clear when the court spelled out the meaning of “details underlying”:

“The details underlying the published data are the communications relating the data, the document, if any, to be published containing the data, all preliminary drafts of the document, and any attorney notes containing material necessary to the preparation of the document. Copies of other documents, the contents of which were necessary to the preparation of the published document, will also lose the privilege.”

This case involved an appeal of an order compelling attorneys to produce documents related to a variety of business transactions, including certain tax-driven corporate restructuring proposals. In Under Seal, the court announced the following test for determining whether a client intended his communications with his attorney to remain confidential: “Rather than look to the existence of the attorney-client relationship or to the existence or absence of a specific request for confidentiality, we must look to the services which the attorney has been employed to provide and determine if those services would reasonably be expected to entail the publication of the clients’ communications.”

The breadth of Under Seal is made apparent in the court’s discussion of the documents the attorneys were ordered to produce. For example, “[d]ocument 11307 relates to loans from a corporation and its pension plan to John Doe. This is a public transaction, and the communications relating to it do not enjoy the privilege. . . . Documents 020097-100 also relate to the proposed purchase of another business and as such the information contained in the documents would reasonably be expected to be imparted to a third party. . . . [T]he remaining documents that we agree are not privileged . . . contain attorney notes relating to public transactions.”

Practical Tips

Despite more recent contrary rulings in other circuits, the rulings in In re Grand Jury Proceedings and Under Seal continue to control issues of privilege and the preparation of public documents in the Fourth Circuit, and companies should consider their implications when preparing public documents. If the Fourth Circuit cases are taken literally, all communications necessary for the preparation of documents involved in corporate transactions, and all preliminary drafts of such documents, are not privileged. 

Therefore, we recommend that, at the beginning of each significant transaction or other potentially publicly disclosable event, key personnel be advised to send potentially sensitive content to counsel and request legal advice as to whether/how to communicate it, both internally and externally.

Also, one fail-safe method of precluding discovery of many of the written documents evidencing such communications is to adopt a policy requiring that all drafts, notes and internal memoranda be destroyed. Of course, a problem with routine destruction of documents is the blanket assumption that the destroyed documents will benefit only the opposing party, and not the party destroying them. Therefore, this is a policy best implemented when the transaction has been completed, rather than during negotiations, to allow for case-by-case exceptions.


Additional Articles from the Winter 2012 Public Company Forum:


Playing the Government Incentives Game

Shedding Light on Political Spending

Angry Birds and Board Books: The Case for Electronic Board Portals

Dodd-Frank Act Progress Report: Winter 2012