New York Appellate Division Eliminates 'Pending Or Reasonably Anticipated Litigation' Requirement For Common-Interest Privilege

On December 4, 2014, the New York Appellate Division, First Department, removed previous restrictions on New York's common-interest doctrine when applied to the exchange of privileged information in mergers and acquisitions. Bringing New York in line with Delaware and other jurisdictions, the Appellate Division held that the common-interest doctrine applies to legal interests beyond actual or threatened litigation: "We hold that, in today's business environment, pending or reasonably anticipated litigation is not a necessary element of the common-interest privilege. . . . Indeed, the circumstances presented in this case illustrate precisely the reason that the common-interest privilege should apply — namely, that business entities often have important legal interests to protect even without the looming specter of litigation."1

ATTORNEY-CLIENT PRIVILEGE & ITS ROLE IN M&A DEALS IN NEW YORK

As is commonly understood, the attorney-client privilege is designed to "encourage full and frank communication between attorneys and their clients."2 It ensures that clients can share information with their attorneys in confidence when seeking legal advice—and that their confidential information will not be disclosed. But the attorney-client privilege is not absolute, and generally is waived when otherwise protected information is shared with a third party outside of the attorney-client relationship. This general rule is particularly problematic in the context of mergers and acquisitions, because acquiring companies often ask target companies to disclose privileged information, including assessments of the target's exposure to liability.

The solution is often to exchange otherwise privileged information under the common-interest doctrine, which provides that "a third party may be present at the communication between an attorney and a client without destroying the privilege if the communication is for the purpose of furthering a nearly identical legal interest shared by the client and the third party."3

While parties to a transaction routinely enter into common-interest arrangements to share privileged information, the question remained whether the privilege would be respected if a third party challenged the invocation of the common-interest privilege. Many jurisdictions have upheld the common-interest privilege in the merger context, finding that companies seeking to execute a lawful merger or acquisition satisfied the requirement of sharing a common legal...