Focus: Commercial Litigation – November 2003
Privilege in the context of mergers and acquisitions: investment bankers beware
In brief: Partner Stuart McCulloch (view CV) and Senior Associate Kim Reid consider whether communications between lawyers and investment bankers who act for the same client in a transaction are protected by legal professional privilege.
- Legal professional privilege
- The case
- Agency argument
- Types of communication important
- Waiver of privilege
- What does this mean for M&A advisers?
Most, if not all, significant mergers and acquisitions involve a client retaining the services of lawyers and investment bankers. These advisers and the client work together as a team with the goal of completing a transaction in a manner that both meets the client's objectives and protects its interests. Commonly, a large volume of documents is created during this process, in the form of emails, facsimiles and handwritten notes. A recent decision of the Federal Court serves as a useful reminder that it cannot be assumed that all of these communications fall under the privilege umbrella.1
Legal professional privilege
Legal professional privilege is an important common law immunity that exempts privileged communications from being disclosed, for example, for use in court proceedings or during the course of investigations or prosecutions that are conducted by regulatory authorities such as the Australian Securities & Investments Commission.
In Australia, legal professional privilege attaches to:
- confidential communications passing between a client and the client's legal adviser, for the dominant purpose of obtaining or giving legal advice. This is known as legal advice privilege; and
- confidential communications passing between a client, the client's legal adviser and third parties, for the dominant purpose of use in or in relation to litigation, which is either pending or in contemplation. This is known as litigation privilege.
There is an important distinction between legal advice privilege and litigation privilege. Generally speaking, if one of the parties to a communication is a third party to the client/lawyer relationship, a valid claim of privilege cannot be made unless legal proceedings are either anticipated or are actually on foot. However, there are exceptions to this rule that are pertinent to the role of investment bankers in M&A transactions. Where litigation is not in prospect, a claim for advice privilege in respect of a communication with an agent of the client can be sustainable if the agent is an agent for the purpose of communicating with the client's legal adviser.2
The following case looks at whether an investment banker is likely to be an agent of a client in a transaction for the purpose of communicating with the client's legal adviser. If so, communications between the bank and the client's lawyers can attract a claim for legal advice privilege in some circumstances.
The case
In DSE (Holdings) Pty Limited v InterTAN Inc, DSE sought access to a number of documents that were subject to a claim for privilege by InterTAN Inc. The circumstances in which it did so are recited in the judgment and in an earlier judgment of the court in the same matter.
InterTAN Australia Limited (a subsidiary of InterTAN Inc) owned and operated the Tandy businesses in Australia. By a share acquisition agreement, DSE (which owned the Dick Smith Electronics businesses in Australia) acquired all of the shares in InterTAN Australia Limited. InterTAN Inc was assisted in that transaction by its lawyers and a well-known investment bank.
Following the execution of the share acquisition agreement, a dispute arose in relation to the manner in which post-completion adjustments were to be performed. DSE commenced proceedings against InterTAN Inc in the Federal Court, alleging, among other things, that the agreement should be construed in a particular way. In the course of the proceedings, InterTAN Inc filed a list of documents which disclosed that it made a claim for privilege in respect of a number of documents to which the bank was a party. These documents consisted of emails and other correspondence which passed between InterTAN Inc, its lawyers and/or its investment bank during the course of the share sale.
As no proceedings were anticipated or on foot at the time that the documents in question were created, the relevant claim for privilege was one of legal advice privilege. One of the bases on which privilege was claimed was that (in accordance with the reasoning of the Federal Court in Commissioner of Taxation v Pratt Holdings Pty Limited ), the documents to which the investment bank was a party, were communications by, or to, an agent of the client for the purpose of making or receiving communications to or from the client's legal adviser.
In support of its claim for privilege, InterTAN Inc maintained that the investment bank was its agent for the relevant purpose and that the investment bank should be treated as standing in the shoes of InterTAN. DSE sought to challenge that proposition and asserted that the documents were not privileged.
Agency argument
The argument turned on principles that were considered in the Pratt Holdings case. In Pratt, it was argued that Price Waterhouse (now PricewaterhouseCoopers) acted as Pratt's agent in preparing a valuation on behalf of Pratt's lawyers. The important findings in Pratt were that Price Waterhouse was not retained to act as an agent for the purpose of communicating with Pratt's lawyers. Price Waterhouse never communicated directly with the lawyers and the fact that the valuation was sent by the client to the lawyers to be used by them was not sufficient.
However, in InterTAN, the investment bank communicated directly with InterTAN's lawyers. The evidence was that InterTAN, the investment bank, and InterTAN's lawyers worked together as a team and used each other as 'sounding boards' with the common aim of completing the transaction in a manner that best suited the interests of InterTAN. The court found that:
- InterTAN had engaged an investment bank and lawyers to assist it in the negotiation, documentation and execution of a commercial transaction, which required the skilled and careful advice of lawyers and experienced commercial people within the investment bank;
- it was implicit in the retainer of InterTAN's lawyers, that they were to provide all relevant legal advice on matters in connection with the transaction as they arose in discussion with InterTAN or the investment bank;
- in a transaction of this kind, InterTAN would expect aspects of what was done or not done that might be of significance, to be considered by and discussed among the lawyers and investment bankers;
- there was a clear obligation of confidence owed to InterTAN by the investment bank and the lawyers;
- the lawyers were authorised and expected to communicate material to the investment bank (including privileged material) if the lawyers thought that the investment bank should know of it, or had asked for it;
- the investment bank was authorised and expected by InterTAN to receive and pass on any information or document concerning the transaction that it thought appropriate to do so; and
- each of the lawyers and the investment bank were the agent of InterTAN to request, give and receive views and information to and from each other, for the purpose of effecting the transaction on behalf of InterTAN.
The judge referred to an early decision in this area,3 to the effect that if a person is employed as an agent on the part of a client to obtain legal advice, the person stands in the same position as the client stands in relation to privilege protection, and the person's communications with the lawyer stand in the same position as the communications of the client with the lawyer.
Types of communication important
It was suggested by DSE that some of the investment bank's documents were not privileged, as they were brought into existence for the dominant purpose of obtaining or receiving financial advice, rather than legal advice. The court noted that a distinction could be made between:
- documents sent by lawyers to the investment bank and/or InterTAN Inc;
- documents sent by the investment bank to the lawyers; and
- communications between the client and the investment bank that were not, on the face of it, privileged.
The Court found that the lawyers' communications with the investment bank were privileged. The investment bank was authorised to receive communications from the lawyers on behalf of the client and the lawyers' communications were part of its retainer with the client.
The communications generated by the investment bank and sent to the lawyers were subject to different considerations. Commonly, investment bankers have two roles in transactions: the provision of advice to the client and the role of communicating the client's instructions to the client's lawyers to effect the transaction. The court accepted that the investment bank's communications with the lawyers should be treated as the client's communications with the lawyers because of the mandate it had been given by the client. However, an issue arose in relation to the fact that investment bankers may have dual roles.
Reference was made in InterTAN to decisions that suggest that an agent who is appointed to communicate with a lawyer must do no more than pass on knowledge or information received from the client. The court had difficulty in accepting that proposition. Having regard to its finding that the investment bank was InterTAN's agent for the relevant purpose, the court noted that if it declined to follow those decisions, it would conclude that:
- the investment bank's role did not have to be limited to that of messenger to attract a claim for privilege for the relevant documents; and
- discourse between the lawyers and the investment bank with reference to the lawyers' retainer (even where the investment bank does more than simply pass on information from the client) could attract a claim for legal advice privilege.
On this issue, the court reserved its decision in relation to a number of the documents that were sent by the investment bank to the lawyers, until further submissions are made by the parties following a pending decision of the Full Court of the Federal Court in another matter.
The court also looked at communications between the investment bank and the client that had been copied to the lawyers. In finding that some of these documents were not privileged based on their descriptions, the court noted that the mere fact that a document had been copied to the lawyers was not sufficient to give rise to privilege. It remains necessary that the communications in question should be made for the purposes of the lawyers' retainer.
Waiver of privilege
The key issue in InterTAN was whether documents generated as part of an acquisition transaction were privileged. A different question not considered on the facts of InterTAN is whether an otherwise privileged document can lose that privileged status by being communicated to a third party. Lakatoi v Walker4 was a case of this sort where the question was whether privilege was waived in communications between a client and its lawyers on the basis that those communications were also copied to members of a due diligence committee. The committee had been formed to undertake matters relating to the float of a private company and was comprised of the client, its lawyers, investment bankers, the investment bank's lawyers and accountants.
The court recognised that the deliberations of the due diligence committee were confidential and that the members of the committee were not at liberty to disclose them. In those circumstances, it was held that there was no waiver of privilege. This decision conforms with the views subsequently expressed by the High Court in Mann v Carnell 5 in which it was held that the question to be considered is whether disclosure to a third party is inconsistent with the maintenance of the confidentiality which the privilege is intended to protect.
What does this mean for M&A advisers?
Parties to significant transactions should not assume that all of their communications will be protected by legal advice privilege. Ultimately, the question of whether a document is privileged will depend on the particular circumstances.
To the extent that investment banks are involved in transactions, the question of whether documents are privileged on the basis that the bank can be said to have been appointed by the client as an agent to communicate with the lawyer, will turn on the facts. The court found on the evidence in InterTAN that there was a relevant agency relationship that entitled InterTAN to maintain its claim for privilege for a number of documents to which the investment bank was a party.
Investment bankers, lawyers and clients will need to await a pending decision of the Full Federal Court in an unrelated matter and a further decision in InterTAN, before issues relating to communications by the investment bank will be fully resolved. In the meantime, parties should carefully consider the way in which they communicate with each other in transactions and examine the terms of their retainers. In particular:
- privilege in written communications between parties to
a transaction may be more likely to be maintained if:
- the document is generated by a lawyer or the client in connection with the transaction. Marking documents 'Strictly Private & Confidential – Subject to Legal Professional Privilege' is a good way to highlight the nature of the document;
- procedures are put in place to ensure that if a document is to be sent to a third party, this is done on an express basis of confidentiality; and
- communications between a client and the investment bank are copied to a lawyer and the lawyer is asked to comment on aspects of that communication.
- At the very least, the retainers should include
acknowledgments that:
- the investment bank and the lawyers owe an obligation of confidentiality to their client;
- lawyers and investment bankers are authorised (and possibly expected) to communicate information to each other (including privileged information) if they consider it necessary or appropriate to do so; and
- these communications are to be made for the purpose of effecting the transaction on behalf of the client, in a manner that best suit's the client's interests.
References
- DSE (Holdings) Pty Limited v InterTAN Inc [2003] FCA 1191 (30 October 2003)
- Commissioner of Taxation v Pratt Holdings Pty Limited [2003] FCA 6, per Justice Kenny at [51] and [54].
- Wheeler v Le Marchant (1881) 17 Ch D 635
- [1999] NSWSC 156
- (1999) 201 CLR 1
For further information, please contact:
- Paul NicolsPartner,
Sydney
Ph: +61 2 9230 4414
Paul.Nicols@aar.com.au - Geoff RankinPartner,
Brisbane
Ph: +61 7 3334 3235
Geoff.Rankin@aar.com.au
