In the course of negotiating a deal for the sale of a division of your business, the buyer’s external legal counsel prepares a memo for its senior management team on the tax elements of the transaction. As part of the negotiating process, the buyer’s lawyer shares the memo with your legal counsel to jointly arrive at an optimal, tax-efficient structure for the transaction. After the deal closes, the Canada Revenue Agency (CRA) believes that the transaction might have been used to avoid tax payments triggered by the sale and wants to see a copy of the memo. Can you legally refuse?
Until December 2016, the answer would likely have been, “Yes.” Something known as “transactional common interest legal privilege” would have applied. Now, it’s unclear.
Let’s take a step back: When the buyer’s legal counsel prepared the memo, it was protected by what is known as “solicitor-client privilege.” The memo was a confidential communication between the buyer and its legal counsel and it contained legal advice. These are the two requirements for solicitor-client privilege to kick in. And when it does, the memo doesn’t have to be shared with third parties like the CRA. The solicitor-client relationship lies at the heart of the legal system. Without solicitor-client privilege, clients might hesitate in making full and frank disclosure of all relevant information to their legal counsel including facts that might be detrimental. Lawyers and their clients are less likely to have candid conversations about available legal options and the risks of pursuing different legal strategies if they know that those communications might have to be disclosed to government agencies, securities commissions or even private parties in litigation like competitors, customers and suppliers.
Generally, when documents protected by legal privilege are shared with a third party, privilege is lost. But when documents are shared in the context of a transaction and with a third party who shares a common interest in the transaction—as in our situation above—an exception known as “transactional common interest privilege” can apply. Documents shared under such circumstances may continue to be protected by privilege. Transactional common interest privilege is not a form of legal privilege itself, but it protects against the loss of privilege in certain circumstances. Specifically, it applies if a document: (i) is already subject to legal privilege—be it solicitor-client privilege, litigation privilege (see below) or both; and (ii) has only been shared on a confidential basis between parties with a common interest in a transaction.
At least, that used to be the case—until last December, when the Federal Court of Canada shocked the legal and business community by finding in Iggillis Holdings Inc. v. Canada (National Revenue) that there was no such thing as common interest privilege in the context of transactions. In fact, our example above is adapted from the facts in Iggillis. In that case, the Federal Court ruled that the vendor was required to produce the memo to the CRA. The decision has been appealed (a decision is pending), but already Iggillis provides an important reminder of the precautions and procedures you should have in place when negotiating deals.
To that end, here are some best practices on how to structure the sharing of documents so as to give it your best shot to protect privilege—but, there is no guarantee that even these precautions will protect you.
• Have a written agreement with the other side. Before you share any privileged documents, get counterparties to sign a non-disclosure agreement. The recipient should expressly agree to: maintain the documents in confidence; not share them with its non-legal advisers or any other third parties; not over-circulate them internally within their organization; and, take all necessary steps to resist production when demanded by a third party. In that agreement, also include an explanation of the common interest served by the exchange of privileged documents—for example, the sharing of privileged documents is a prerequisite for the due diligence to be conducted and the deal to proceed. One way to possibly show this: have the purchase and sale agreement clearly stipulate that the purchaser has a right to compel the disclosure of the vendor’s relevant privileged materials before closing the deal.
• Include cover letters referring to the non-disclosure agreement. When sharing documents, include cover letters or cover e-mails referring to the non-disclosure agreement. Explicitly state that the documents are already protected by legal privilege and, as per the agreement, they are being shared on a confidential basis between parties with a common interest in a transaction. All this will help in showing a court that the documents were intended by both parties to be shared on a confidential basis.
• Limit the distribution of privileged documents. As courts may or may not recognize transactional common interest privilege, rely on it sparingly. Be selective in the number of privileged documents shared with the other side and limit access to a small group on a “need to know” basis. If possible, don’t provide actual copies of privileged documents to the other side. Instead, invite them to your offices to review the documents.
• Clearly identify privileged documents. Privileged documents should be clearly marked as privileged when they are created, whether or not you end up sharing them in a transaction. Don’t rely on privilege being obvious from the contents of a document. If a document is not protected by privilege, share prudently. Remember, transactional common interest privilege doesn’t protect documents that are not already subject to legal privilege.
• Consider seeking joint legal representation. For certain matters, you could hire joint legal counsel with the other side in addition to your separate legal counsel—for example, to review and discuss with both parties a sensitive tax structuring memo. Advice from the joint legal counsel to both parties would be protected by privilege without the need for showing a common interest.
• Be cognizant of jurisdictional differences. Some U.S. jurisdictions such as New York do not recognize transactional common interest privilege for now. It is prudent to consult external (local) counsel when unsure of jurisdictional differences.
A SECOND AREA where issues of legal privilege routinely come up is in the boardroom. There, privilege is often confused with confidentiality and the “in-camera” label. Confidentiality is a necessary element of legal privilege. But, board meeting minutes and board discussions are not necessarily protected by legal privilege simply because the board meeting is confidential or because you have labelled a portion of the meeting “in-camera.” This means that in at least some scenarios where an outside party might demand access to meeting minutes or other board documents—a terminated CEO; a supplier who lost a contract; or shareholders in a class action, say—those requests could be granted.
Some might think that having a lawyer present in the boardroom—either one of the directors or the company’s in-house counsel—during the discussions in question is enough to ensure legal privilege. But this is not the case. Solicitor-client privilege will only attach if legal advice was being sought or given. So, if you have a lawyer present, you need to think about the capacity in which he or she is attending. Is the board member there as a lawyer or a director? Is in-house counsel providing legal advice or business, operational and strategic advice? If confidential legal advice is given or presented to the board, then those portions of the meeting minutes and materials will be subject to solicitor-client privilege and don’t need to be disclosed. But, if the board member or in-house counsel is acting in a non-legal capacity, you’re out of luck.
There are further exceptions. If during a portion of a board meeting the board’s discussions relate to preparation for, or discussion of, litigation strategy, it’s likely that “litigation privilege” will apply. Litigation privilege encompasses solicitor-client communications (and communications with third-parties) relevant to litigation. For this, you need to be able to establish that the dominant purpose of that portion of the meeting was to prepare for litigation or to discuss litigation strategy. Litigation privilege might apply if the board anticipates a wrongful dismissal action from the CEO or a breach of contract action by the supplier and in-house or external legal counsel are providing legal advice in relation to the possible litigation.
Beyond those specifics, we’ll conclude by outlining several steps a board can take to limit potential exposure and protect the company’s privilege.
• Record board minutes clearly. Ensure that the minutes reflect the criteria required to establish privilege, where appropriate. Educate your company secretary on the different types of privilege and the relevant legal tests. Label sections with privileged information in the minutes clearly. This will make it easier to find and redact privileged information, if you find yourself in the midst of litigation.
• Be clear on when a lawyer’s presence will give rise to privilege. Any lawyers on the board or in-house counsel should expressly identify the capacity in which they are acting. Consider having external counsel (whose only purpose is to provide confidential legal advice) attend board meetings to address legally sensitive matters.
• Ensure that privileged information is not presented to the board if third parties are present. If legal advice or litigation strategy is presented to third parties (accountants, underwriters, board observers, consulting engineers), it will not be confidential and therefore not privileged.
• Restrict circulation of board minutes. Over-circulation of board minutes can suggest that they are not intended to be confidential (and therefore not privileged). Additionally, ensure that board minutes are not circulated to conflicted directors.
Poonam Puri is an experienced corporate director, governance expert and law professor at Osgoode Hall Law School. E-mail: firstname.lastname@example.org. Patricia Olasker is a leading M&A lawyer and an adjunct faculty member at Osgoode. Tony Alexander is a leading dispute resolution lawyer and an adjunct professor at the University of Toronto Faculty of Law.