Attorney-Client Privilege In M&A: How Brokers And Other Advisors Can Create Serious Risk

Today let's talk about the attorney-client privilege, how important that safeguard is in M&A transactions, and how not to mess it up. Specifically, let's discuss this scintillating topic in the context of working with brokers and other non-legal advisors over the course of a deal. The goal is to save you a good deal of money.

The attorney-client privilege, briefly

In the big picture, attorney-client privilege is a legal doctrine, or rule, protecting confidential communications between you and your lawyer (oral, written, whatever). It prevents lawyers from disclosing these private discussions, lest they invite serious consequences. You probably know all of this. What many people don't appreciate is that this durable privilege belongs exclusively to the client—and, as powerful as the attorney-client privilege is, it is easily waived. Many clients unintentionally waive privilege in deals, with scant appreciation for the implications.

How attorney-client privilege gets waived, in M&A

A common form of waiver is the inclusion of business brokers and other advisors on substantive communications with counsel. Waiver may occur where brokers or other advisors are included on communications but are not necessary to the rendering of legal advice. In these cases, the advisors often fall outside of what are known as the "indispensable agent" and "common interest" exemptions.

There is a lot of case law on this issue, and the precise formulation varies by jurisdiction, but the core principle is consistent. And the standards are high. In Delaware, for example, the fact that a party intends confidentiality, and subjectively believes the communication will remain confidential, isn't enough. Under Delaware law—which governs many deals—a party's "subjective expectation of confidentiality must be objectively reasonable under the circumstances."

The question of whether a party had an objectively reasonable expectation of privacy is highly fact-intensive, and the burden is on the party asserting the privilege to prove that it applies. This is not an area you want to litigate. Even fighting over privilege can be extremely expensive.

Why waiver of the attorney-client privilege matters

Why is this a big deal? The short answer is litigation. M&A transactions are frequently litigated, unfortunately. Roughly one in five M&A deals will result in a dispute, and roughly one in 10 involves a claim over $10 million. As a lawyer who frequently runs deals above and below that $10 million line, I can attest that smaller matters are litigated with similar frequency.

Litigation is terrible, and one of the worst things about it is something called "discovery." This is where each party is entitled to look at materials in the other party's ambit that may be relevant to their claims. Discoverable materials include correspondence, of course, and relevant correspondence may only be withheld if it is privileged. Emails in which a broker or other "dispensable agent" are included often aren't privileged.

Once the attorney-client privilege is cracked open, it's difficult to wrangle. This is another area that is subject to case law in various states, but generally speaking, if you waive privilege—e.g., in an email discussing what to include on a disclosure schedule—you may be deemed to have waived it over the entire subject matter. You can't retract that broader waiver; you can't un-ring a bell.

What kinds of disclosures are most damaging to the attorney-client privilege

The most damaging disclosures often center on areas frequently litigated in M&A. Those include: representations and warranties, tax- and valuation matters, third-party claims, and post-closing matters—e.g. working capital adjustments or failures to meet earn-out targets. But really, any area can be hazardous.

Above, I gave the example of an email regarding "what to list on a disclosure schedule" as a potentially non-privileged communication, if that email includes a non-essential advisor. Because disclosures are closely tied to representations and warranties, loss of privilege could be a tremendous hazard in this example. If a non-privileged email reveals that the party decided not to disclose something material, and that omission forms the basis of a claim, the loss of privilege could be devastating under the harsh spotlight of a fraud or misrepresentation claim.

Safeguarding the attorney-client privilege– an Elon Musk example

The acquisition of Twitter (now X) by Elon Musk a few years back raised interesting, expensive privilege questions in an M&A deal. Musk was using various, non-personal email addresses to communicate with his lawyers, which Twitter argued removed his expectation of privacy. Twitter argued that Musk's communications included third parties, in essence, and broadly waived privilege. Motion practice ensued on that issue, which I'm sure was enormously expensive and likely had a material impact on the outcome of the case.

Musk may be making another example in this saga as we speak. A story surfaced last week where Musk reportedly "told jurors that his lawyers warned him he was unlikely to defeat Twitter's suit [because of judicial bias]." I'm guessing opposing counsel is preparing any number of motions to get at previously undiscoverable, attorney-client communications. Stay tuned.

Key takeaways

First, never include third parties on communications with your lawyer, unless those parties are indispensable to facilitating legal advice, and unless you've vetted the communications protocol already with your attorney. "Third parties" may include insurance brokers, business brokers, employees, key vendors, etc. It's just not worth the risk.

Second, never tell anyone "my lawyer advised [this or that]." If you need to communicate with a third party involved in your M&A transaction related to attorney-client matters, limit those communications to basic updates (e.g. "my lawyers are looking over the drafts" or "we expect to sign next week"). You really want to protect the attorney-client privilege. You may need it.

Attorney-Client Privilege in M&A FAQs

Does copying a broker or consultant on an email to my lawyer waive attorney-client privilege?

It can. If the broker, consultant, or other advisor is not necessary to the rendering of legal advice, including that person on the communication may destroy privilege. Do not assume that a broker's importance to the deal makes that broker necessary for privilege purposes.

Can I tell a third party what my lawyer advised?

Generally, no. Disclosing legal advice to a third party can waive privilege for that communication and, in some cases, for other communications on the same subject.

Why does attorney-client privilege matter so much in M&A disputes?

Because if privilege is lost, sensitive communications about diligence, disclosures, negotiations, risk allocation, and post-closing issues may become discoverable in litigation. That can be expensive, distracting, and damaging.

Does marking a document "Attorney-Client Privileged" make it privileged?

No. Labels may help show intent, but they do not create privilege. The communication must actually satisfy the legal requirements for privilege, and including unnecessary third parties can still destroy it.

Are brokers, consultants, or other advisors ever covered by attorney-client privilege?

Sometimes, but only in limited circumstances. The analysis is highly fact-specific, and courts often apply these exceptions narrowly. You should not assume an advisor falls within them without first discussing the issue with counsel.

Can waiving privilege for one email lead to a broader waiver?

Yes. In some circumstances, waiving privilege for one communication can trigger a broader subject-matter waiver, requiring disclosure of other communications on the same topic. That is one reason even a single careless email can create outsized risk.

What happens to privileged deal communications after closing?

That depends on the governing law, the deal structure, and the transaction documents. In some cases, control over privilege relating to deal communications may pass to the surviving company or buyer unless the agreement expressly addresses the issue.

How can I protect privilege during an M&A deal?

Set clear communication protocols with counsel at the outset. Do not include brokers, consultants, or other non-legal advisors on legal communications unless your lawyer agrees their involvement is necessary. And do not forward or paraphrase legal advice to outsiders.

Attorney-Client Privilege in M&A: How Brokers and Other Advisors Can Create Serious Risk

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.