Be Warned: As Fiduciary Duties Shift, So, Too, Can Privilege

Picture this. Years after leaving your in-house counsel role at Company A, you find yourself being deposed in a litigation matter with Company A’s adversary inquiring into your legal notes and internal privileged communications. Sound scary? Unfortunately, this could happen in several scenarios, but you can take steps to mitigate the risk.

So how does a former in-house counsel find herself in this position? One example is where Company A declares bankruptcy. Once that happens, the trustee or creditor’s committee of the now-bankrupt Company A will likely look for all opportunities to assert claims—including fiduciary duty claims—against the company’s officers and directors, both former and current (which may or may not include the general counsel in her official capacity). But what may surprise those former D&Os is that the party now controlling the bankrupt entity, whether it be a trustee or creditor’s committee, now controls Company A’s privilege. Therefore, any privileged communications within the possession of Company A are fair game, and counsel in the adversary proceeding can freely ask questions regarding those communications.

This scenario can play out with even more complications when Company A is a subsidiary of Parent, Inc. Once Parent, Inc. begins to make plans to divest a subsidiary or affiliate or put it into bankruptcy, that company should immediately begin to take steps to not only ensure that fiduciary duties are met under the Revlon standard1 but also to protect both Parent, Inc.’s and Company A’s respective and joint attorney-client privileges.

In many corporate enterprises with multiple entities, often a single legal department serves all corporate entities, often through an intercompany-services agreement. This usually works well and is more efficient when all the corporate entities’ interests are aligned. But once a parent begins to look for either strategic divestment opportunities or restructuring options for its subsidiary (here Company A), that alignment can shift.

As a result, the officers and directors of Company A (who are often the same or overlapping officers and directors of Parent, Inc. or other sister companies) need to ensure they are meeting their fiduciary duties to Company A, and they must be very careful about which hat they are wearing at any given time. One potential safeguard is to ensure that Company A has its own general counsel—not an attorney who is also serving in some capacity for Parent, Inc. but rather someone whose sole duty is to Company A.

Not only is this prudent from a governance and fiduciary-duty perspective, but it also helps both companies preserve their respective attorney-client privileges. If care is not taken to draw a clear line between Company A and Parent, Inc.’s respective legal representation, even Parent, Inc.’s privileged information could also be vulnerable. Consider this scenario: Company A does not have its own general counsel, and Parent, Inc. continues to offer Company A legal advice even after Parent, Inc. decides to divest Company A. After the sale, Parent, Inc. retains possession over those communications. Parent, Inc.—once served with a subpoena or discovery requests during later litigation—will have a hard time withholding those communications as privileged because it no longer controls Company A’s privilege. And those communications and notes often reflect advice to both Company A and Parent, Inc., creating a sticky wicket for Parent, Inc.’s litigation counsel, who must try to decipher and draw a line between the two—and then defend that line. Thus, it is imperative that Parent, Inc. take steps to ensure that Company A has its own general counsel once it is put up for sale if it did not already have one.

So, how can both counsel for Parent, Inc. and Company A best protect themselves in these scenarios?

  • Identify if there is a chance that Parent, Inc.’s and Company A’s interests could become adverse or, at least, less aligned. Is Company A struggling, and will Parent, Inc. need to consider various restructuring options? Is Parent, Inc. looking to otherwise strategically divest Company A? In either of these situations, Parent, Inc. would be well served by appointing a general counsel to serve solely as Company A’s general counsel.
  • If Parent, Inc. appoints someone from the cadre of Parent, Inc.’s in-house counsel to serve as Company A’s general counsel, which often happens, follow these precautions:
  • Make clear the date that the person went from representing Parent, Inc. to Company A and ensure that the transition is complete by that date. It is too easy for employees of Parent, Inc. to continue to turn to that person, blurring the line between the two companies and jeopardizing the very purpose of appointing a general counsel for Company A in the first place.
  • Make every effort to use a separate means of communication for the new role. Continuing to use the same email the person used when she served as counsel for Parent, Inc. will result in Company A’s privileged materials being mingled with Parent, Inc.’s.
  • Where a common interest exists on certain issues between Parent, Inc. and Company A, it may make sense to formalize an agreement to recognize such a common interest and make clear that—by sharing communications—neither party is waiving their respective privilege. While this agreement may not prevent Company A’s new owners from inquiring about or obtaining its privileged materials, it should give Parent, Inc. some leverage to ensure that Company A cannot waive privilege over common-interest communications without Parent, Inc.’s consent.
  • Utilize Parent, Inc.’s and Company A’s retention policy and ensure that it is followed—subject, of course, to any litigation hold requirements. There is often a considerable volume of communication reflecting the negotiation of Parent, Inc.’s divestment of Company A. And depending on the circumstances surrounding that divestment, it could be quite contentious and adverse. It may not be helpful for the new owners of Company A to have full access to Company A’s former owners’ privileged communications during the sale process. Therefore, absent prohibitions to destroy those otherwise privileged (or even non-privileged) communications, it may be wise to delete them. Obviously, great care must be taken in doing so.

While these steps do not guarantee that in-house counsel will not find herself subject to a deposition if control of the privilege shifts to a now-adverse party, they will hopefully help to protect the various privileges in play. If nothing else, appreciating the risk of your words and advice landing in unexpected hands should cause one to think twice about what is stated in writing.2

1 Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986) (landmark decision of the Delaware Supreme Court holding that when the breakup or sale of company was inevitable, “[t]he directors’ role changed from defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company”).
2 For some excellent tips on managing risk in email communications, please see Thomas Berndt’s article published in the Spring 2022 issue of Spotlight.

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