Keeping Deal Information Confidential in a Digital World

Not long ago, when complex business transactions were negotiated by a handful of lawyers and executives around the boardroom table or over a few conference calls, managing confidentiality and maintaining the attorney-client privilege was relatively straightforward. In today's digital world of webcasts, email, instant messages and cloud sharing, the task has become far more difficult.

The consequences of failing to maintain the privilege can be significant. The most basic concern is that the integrity of the dealmakers is on the line. The release of sensitive materials or candid conversations about legal options can severely damage the reputation of individuals and organizations, and that's particularly problematic for the outside bank or law firm that sells its services to demanding business clients. Breaches can also reveal critical operational information that could significantly harm the competitive advantage of the businesses involved in the transaction. Perhaps most importantly, the released materials and conversations will surely be used as fodder in any litigation over the deal – which has become commonplace in today's environment, particularly when a deal fails. Candid discussions about leverage points and tactical advantages will likely be portrayed in the worst light possible.

The governing principles of attorney-client privilege have remained largely the same over time, but advances in technology make it critical to understand how to apply these principles across all platforms, and safely navigate this minefield.

The basics are simple: to qualify as privileged, a communication must be between attorney and client for the purpose of facilitating legal advice and be "primarily or predominantly" of a legal character, or a retransmission of such a communication among the client's employees engaged in the transaction.  While the known presence of a third party typically waives the privilege, a "common-interest" privilege may apply in certain circumstances. Specifically, the privilege may be extended to include non-clients who are in an "ongoing common enterprise" with the client when there is reasonable anticipation of litigation and an expectation of confidentiality. It is essential, however, that the nature of the parties' legal interest be identical, or nearly identical.

Take, for example, a lender or private equity syndicate involved in a complex restructuring, in which discussions among lawyers, bankers and financial analysts would be required. To make matters more complex, the "players list" usually includes a bevy of outside experts including accountants, crisis management experts, restructuring gurus and other consultants. It is inevitable that this wide group of participants will be involved in conference calls, emails, voicemails, web conferences, instant messages and more. And for the legal teams to do their jobs, all deal participants must be brutally candid and consider all leverage points and strategies.

To maintain privilege, all multi-party communication must first meet the basic qualification that it is of a legal nature. Communications that include a mixture of business and legal considerations will usually qualify, as long as the primary purpose is legal. Discussing the status of the borrower's basic operations, for example, would not void an otherwise privileged communication.

Ensuring that communications among multiple parties meet the common-interest requirement requires many considerations. Parties must ensure they are sufficiently aligned by carefully evaluating their individual legal interests in relation to the anticipated litigation as well as any other potential conflicts. They must consider how the common interest evaluation would be affected if, for example, a member withdraws from the transaction or one member's unique situation might lead it to be sued independently or singled out for regulatory scrutiny.

Written common interest agreements tend to be the best way to protect group communications since they force the parties to think through all of the issues. But even oral agreements may include general parameters such as how and when information may be shared with members later added to the group. Each member must also consider how the common interest agreement will affect future investment interests and determine if it is consistent with their overall investment objectives.

With all of this, deal teams need to prepare and protect themselves. There are a few practical, but essential, considerations in doing so;

• Always assume that, even when there is a strong privilege argument, a given email, document or conversation might end up before the court or in the hands of opposing counsel;
• Determine who is a necessary participant in the crafting and implementation of legal advice. Set ground rules for participation and establish protocols for taking notes or otherwise memorializing information;
• Whenever possible, take the extra step of documenting the specific legal nature of communications;
• Remember that electronic communications – even those presumed deleted – have a long shelf life and will likely be retained on back-up tapes, by the recipients or in the cloud;
• Be careful what you copy – digital copiers store every image scanned, copied, emailed or faxed;
• Always carefully examine who is copied on communications, since disclosure to third parties may waive the privilege. When hitting "reply all," be certain you know everyone on the distribution list; remember that forwarding privileged communications to other parties might constitute a waiver of the privilege.
• Take careful steps to structure and document common interest arrangements so that communications among the group stay "inside the tent"; and
• Understand that attorney-client privilege does not necessarily extend to digital attachments, even if the underlying communication is privileged.

The attorney-client privilege exists to promote full and candid communications and allow for the development of a robust legal strategy without fear of disclosure. If anything, complicated deals and transactions involving multiple parties require more – not less – flexibility in terms of devising legal strategy. With careful consideration and a clear understanding of the parameters of privilege, deal teams don't have to choose between legal protections and the efficiencies of high-tech, multi-party communications.
Samuel Goldfarb is the general counsel of Black Diamond Capital Management, a Connecticut-based alternative asset management firm. Craig A. Newman is a litigation partner in the New York office of Richards Kibbe & Orbe LLP.