Careful attention must be paid to the attorney-client privilege and the risk of waiver when lawyers for a parent corporation work on projects where an affiliate is a joint client. This article addresses how to maximize the parent’s control of privileges in these circumstances and minimize the risk of waiver.
Generally, in-house corporate counsel may advise an affiliate corporation without undermining the attorney-client privilege. When the interests of a parent and subsidiary begin to diverge, however, privilege questions arise. In re Teleglobe Communications Corporation from the 3rd Circuit involved litigation arising from a parent company’s decision to cease funding its subsidiaries, which led to the subsidiaries filing for bankruptcy and suing the parent. During the litigation, the subsidiary corporation sought production of privileged documents containing legal advice provided to the parent and the subsidiaries prior to the termination of funding by the parent. Teleglobe held that the subsidiaries might be entitled to discover this otherwise privileged information because a joint-client relationship may have arisen. Whether a parent and its subsidiaries have jointly agreed to seek legal advice from counsel is a question of fact that must be examined on a case-by-case basis.
A lawyer who represents a corporation does not, by virtue of that representation alone, necessarily represent affiliated corporations, such as parents or subsidiaries (by the Model Rules of Professional Conduct.) Whether a lawyer represents a client’s corporate affiliate depends not upon any bright line, per se rule, but upon the particular circumstances (by ABA Opinon 95-390). Most courts weigh multiple factors to determine whether an attorney represents both a parent and a subsidiary, focusing on the operational commonality between the affiliated entities and their financial interdependence. Parents and subsidiaries are joint clients protected by attorney-client privilege if they are closely affiliated, share joint management or otherwise share the same legal and financial interests. Generally, where a subsidiary reasonably believes it is a joint client and reasonably expects its communications to be privileged, the subsidiary is a joint client.
When former joint clients sue one another, the default rule is that communications made in the course of the joint representation may be discoverable. Affiliated companies represented by the same joint counsel may also risk losing control of privileged materials if one of the companies is sold to new owners and the formerly affiliated companies become adverse. Some courts have gone further, holding that the joint privilege over information relating to the sale of a subsidiary can unilaterally be waived by the new owner after the sale.
For example, in Polycast Technology Corporation v. Uniroyal, the court held that the buyer of a subsidiary corporation had control to waive the privilege over pre-closing communications between the seller’s general counsel and the subsidiary’s officers concerning the sale negotiation. The buyer later filed a complaint against the seller alleging that it had been provided with false and misleading financial information in the acquisition negotiations. The buyer filed a motion to compel privileged communications between the subsidiary’s general manager and the seller’s general counsel concerning his responsibility to disclose business data to the buyer. The court held that the communications were subject to a joint privilege held by the subsidiary and by the seller, and that the right to waive the joint privilege passed to the buyer once it purchased the subsidiary.
Parent companies can take steps to maximize control over the joint privilege and reduce the risk that privileged documents may be discoverable if its interests later diverge from a formerly affiliated corporation. Because courts have held that the joint-client privilege is limited to matters involving a common interest, when in-house lawyers for the parent company work on a matter for an affiliate, the affiliated companies should identify and document the common interest. When that interest is insubstantial or where the companies’ interests may later diverge, the companies should consider whether to retain separate counsel for the affiliate. Separate counsel should be retained for the subsidiary as soon as it appears that the parent and its subsidiary’s interests have become adverse.
The scope of joint representations by outside counsel of a parent and an affiliate should be limited in an engagement letter to specific matters. Counsel should have the subsidiary acknowledge that its confidential information will be shared with the parent and waive in advance any future conflicts arising from the representation. The engagement letter should also specify who the clients are and that the attorney represents only the named clients and not all affiliates. It should also address who controls the joint privilege in the event that the companies later become adverse. It is important to be aware of case law concerning engagement letter restrictions in the applicable jurisdiction as some courts may strictly construe or refuse to enforce such restrictions.
Finally, in negotiating the sale of a corporate subsidiary, the parties should specifically address the issue of joint privileges. Any parent company negotiating the sale of a subsidiary should request provisions in the sale agreement maintaining control over the attorney-client privilege after closing, especially with respect to communications with counsel concerning the sale process.
The views expressed in this article are exclusively those of the authors and do not necessarily reflect those of Sidley Austin LLP. This article has been prepared for informational purposes only and does not constitute legal advice. This information is not intended to create, and the receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this without seeking advice from professional advisers.