Whether in merger and acquisition, early-stage venture investing, or a technology license, due diligence plays an essential role in evaluating the economics of any technology-centric deal. The due diligence process typically involves sharing significant information and documents, many of which will be confidential, and some of which may involve privileged information and attorney work product. Given the speed at which these deals often take place, the volume of information being shared, and the inherent risks of sharing this legally protected information, parties should know the potential ways privilege and work product protections can be lost (and conversely can be protected) in the due diligence process.
Consider this a best practices guide for founders and investors in the due diligence of technology companies and technology transactions. Following these guidelines will help minimize the risk of unintentional waiver of attorney-client privilege and work product protections. First off, it’s helpful to start with some basic understanding.
What is attorney-client privilege?
Attorney-client privilege is a form of protection that the law recognizes to keep certain communications between an attorney and client private. The protection attaches to confidential communications between an attorney and a client or potential client for the purpose of seeking legal advice (rarely applies to non-legal advice). The attorney-client privilege is distinct from other forms of legal protection, such as joint-defense privilege or attorney work-product protections.
What is work product protection?
Work product protections protect documents and other tangible items prepared in anticipation of litigation. For example, this can include a legal opinion or a document legally analyzing potential claims or counterclaims, etc.
How privilege and work product protections are different
There are critical differences in these protections that clarify the concepts, such as:
- Work product protections apply to documents and other tangible items (but not necessarily to the information within). This protection is irrespective of whether the attorney communicated the information to the client. By comparison, the attorney-client privilege applies to communications, whether written or not.
- Attorney-client privilege is indefinite in length unless waived, but work product protections may cease to exist when the litigation or threat of litigation has subsided.
- The effects of a waiver can be different. For example, while disclosure to third parties can result in a waiver (at least concerning those third parties), the scope of waiver for privileged communications is typically broader than the scope of waiver for work product (generally limited to the information disclosed in the work product and not more broadly to the topic of the work product).
- Attorney-client privilege belongs to the client and can only be waived by the client, but any party may invoke and maintain work product protections. Here’s an example: Even if the client has waived the work product protections, the attorney may still be interested in ensuring internal documents prepared for litigation are not disclosed and may pursue work product protections if doing so does not hurt the interests of the client.
Enter third parties into the mix
Privilege and work product protection can be at risk whenever a third party is granted access to those protected/privileged materials or conversations. Generally, communication in the presence of or to a third party will waive the privilege. With most general rules, there are exceptions. For example:
(1) Where the third party is a consultant whose involvement is essential to the legal advice.
(2) Where the third party is the functional equivalent of the client/employee.
(3) Where the client and the third party share a common interest (a common legal interest).
Some states recognize other exceptions, and those listed above are not all recognized to the same extent in every state or judicial circuit. Therefore, you need to know which exceptions apply to your specific case. In addition, the privilege protections (especially the common interest protections) vary dramatically by jurisdiction, so communications protected in one jurisdiction may be discoverable in another.
For example, many Federal Circuit Courts (see here and here) have rejected the idea that anticipated litigation is the only way for common interest privilege to attach (opening the door for common interest protections to attach to communications in purely transactional matters if the common interests are legal in nature), the state courts in New York have outright rejected the idea that common interest protections can exist without reasonably anticipated litigation. As for state courts, Delaware is generally a business-friendly court, but as it relates to privilege in the M&A context, it rejected the idea that common interest privilege is attached when the common interests between the company and the acquirer are primarily economic and not legal. (See also here for the case of 10X Genomics v. Celsee where the courts allowed discovery of the defendant’s communications regarding the litigation shared with an acquirer). But the California state courts have broadly recognized common interest privilege protections in the M&A context.
Getting the deal done without losing privilege
Whether in the context of mergers and acquisitions, diligence regarding an IP license or during the private equity fundraising process, or the ongoing working relationships between private fund managers and their portfolio companies—there is a genuine risk of unintentionally waiving privilege over certain communications. It may be unavoidable that privileged documents or communications will be shared if you want to get the deal done, but even if the decision has been made there are steps you can take to minimize risk of losing those protections. The scope of these protections will strongly depend on the jurisdiction where the ultimate dispute is being decided, so choice of law and venue in subsequent agreements can also strongly impact the scope of protections.
So how can you protect privilege? Consider these key questions:
- Will you share privileged information at all?
- When will such information be shared?
- How will it be shared?
- With whom will it be shared?
Ask yourself if it’s essential to share this information. How important is the transaction to you if the other side walks away from the deal due to not sharing the information? And how relevant is the privileged information to the transaction? Maybe the data is irrelevant to the specific transaction, and you can simply explain that to the other party.
Even if the information is pertinent to the transaction, you may discuss it with the other party and agree that the risk of losing privilege outweighs the probative benefit. However, unless it changes the deal materially, it may not be worth the risk of sharing.
In my experience from the investor side, I’ve also dealt with companies during diligence where they were unwilling to share any insight or information on, for example, the FTO work they had done regarding a key competitor in the space. Such a blanket refusal to share information can kill the deal or delay the diligence. Conversely, mindlessly sharing all the privileged information with potential acquirers often and early is not advisable. So how can you accomplish the deal while recognizing the need to protect the privilege best?
What is undoubtedly advisable is to enter into a strong confidentiality and non-disclosure agreement before sharing any privileged communications. Such agreements should identify the confidential and privileged nature of the material. You can identify categories of information that are privileged and further limited, even under the NDA, to:
- Avoid unnecessary disclosures of privileged information, even under the NDA, by limiting to specific information and specific recipients with a need to know.
- Stage the timing of the disclosure to ensure that other potential deal hurdles have been cleared (such as the need to disclose at an appropriate stage of the diligence if a successful deal is likely and the privileged information is relevant for the next steps).
- Focus on sharing underlying facts and not the legal conclusions or communications.
- Articulate the common interest that the parties share, ensuring that the interest is beyond the deal’s financials and relates primarily to the shared legal interest.
Before beginning diligence with a funder, sign an NDA that identifies the confidential and privileged nature of the information you share and articulates the funder’s obligation to maintain confidentiality. During diligence, avoid disclosure of information that falls under the attorney-client privilege. And before you sign a non-disclosure or a funding agreement, ensure it contains language articulating the funder’s interest in the litigation outcome, using the term of art “common interest” if applicable in your jurisdiction.
This will help demonstrate that the parties involved recognize the importance of disclosure and protecting the privilege. You may also want to consider sharing certain information only once the diligence has reached a particular milestone or phase of progress, and even then, may limit the disclosure of certain highly confidential or sensitive privileged information to specific individuals with a need to know for due diligence.
Attorney-client privilege and work product protection are important legal protections for what is often some of a company’s most sensitive information. While sharing privileged information and attorney work product with third parties can risk the loss of those protections, it may be unavoidable that certain information is shared. Still, there are proactive steps you can take to be protected and minimize the risk of waiver. It’s a question of careful and proactive steps that will enable you to move your business forward and grow successfully.
The attorneys at Innovators Legal have assisted numerous companies and investors in navigating complex technology transactions involving highly confidential and privileged information. We understand how to balance these protections with the need to get the deal done.
Contact us if you need a partner in the diligence of those transactions.