Court holds that buyer waived its lawyers’ privileged communication when shared during due diligence with the target. The buyer was trying to determine whether the proposed merger would trigger the target’s distribution agreement change of ownership provision and whether the supplier (a buyer competitor) could terminate the agreement without paying a significant termination fee. The court concluded that the buyer and target primarily shared a common commercial interest in these issues and not primarily a common legal interest.
January 7, 2021
Lawyers for a buyer conducting due diligence in an acquisition must be careful about sharing privileged communication with the target. This may amount to waiving the attorney client privilege of communications between a lawyer and its buyer client.
This deal involved the acquisition by a beverage maker of a sports drink distributor by merger for $13.8 billion cash and a 13% stake in the combined entity.
The supplier, a major competitor of the buyer, terminated the distribution agreement that the target had with the supplier, after the closing. The supplier argued that the significant termination fee was not payable, because there had been a change of control under the distribution agreement. The target sued the supplier in the Superior Court of Delaware to recover the termination fee.
The supplier demanded to see certain buyer attorney/buyer client communication that had been shared by the buyer lawyers with the target during due diligence that related to the change of ownership and termination fee provisions of the target distribution agreement with the supplier. The target resisted arguing that the buyer did not waive its attorney client privilege when the buyer’s lawyers shared it privileged communication with the target because the buyer and target shared a common legal interest in understanding and protecting the target’s rights under the distribution agreement.
The court said that the question is whether sharing the buyer’s privileged communications with the target breached the confidential nature of the information and thereby waived the privilege.
“Although sharing privileged communications with … (the target) … generally destroys the communication’s confidentiality, the ‘common interest doctrine’ recognizes that privilege is not waived in communications by … (the buyer) … with … (the target) … ‘in a matter of common interest.’… To maintain the privilege, however, the common interest must ‘involve primarily legal issues, rather than relate to a common interest in a commercial venture.’”
The court in this case held that the privilege was waived: “(The target’s) argument that … (the buyer and the target) … shared a common interest in evaluating and protecting their rights under … (the distribution agreement) … does not satisfy … (the target’s) burden of demonstrating that the shared interest primarily was legal, rather than commercial. The parties may well have shared an interest in positioning the post-merger entity so as to capitalize on Target’s distribution … (agreement) … (The) … focus of the communications … (however) … was the parties’ commercial interest, even though in-house and outside counsel provided input on the drafts.
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)
This was a close call. The lesson is to recognize that due diligence communications between a buyer and seller/target lawyers may not be protected by attorney client privilege.
By John McCauley: I help people manage M&A risks involving privately held companies.
Telephone: 714 273-6291
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