Authored by Nick B. Snavely
In general, the familiar attorney-client privilege and work-product doctrines apply in a restructuring or bankruptcy dispute just as they do in any other litigation matter. Nonetheless, there are complex privilege-related issues and considerations that often arise in the restructuring process. The fast pace of restructuring matters and abrupt shifts in interests and alignment among multiple stakeholders make it dangerous for counsel to deal with such issues purely in a reactive way. Instead, counsel advising an entity going through restructuring should attempt to identify and scope these issues at the outset and take proactive steps as early in the engagement as possible to understand and plan appropriately.
The purpose of this article is not to exhaustively catalogue the nuances of the privilege issues that arise in restructuring matters, nor to discuss or summarize the case law in various jurisdictions dealing with these issues. Instead, this article is intended to serve as a reference for counsel to consider common, recurring privilege issues that can arise in the restructuring context.
A. Parents and subsidiaries
In the ordinary course of business, it is common for parents and subsidiaries (or other related entities) to use the same counsel and to share sensitive information and communications. Such sharing of information is often sensible and efficient and presents low risk of waiving privilege so long as the entities have common legal interests.
Once a restructuring or bankruptcy appears possible, that analysis can potentially change. Disputes can arise between corporate family members, and in some cases, parents or subsidiaries could have claims against each other related to debts and management. Because legal interests have diverged, continuing to share counsel and otherwise privileged communications could result in privilege waiver. To avoid that outcome, counsel should consider the following as part of the initial case assessment and throughout the life of the matter:
- identify any joint or conflicting representation of the debtor and other members of its corporate family;
- conduct a careful evaluation to identify any potential divergence of interests between or among the debtor and other members of its corporate family, including any claims one entity may have against another that could become at issue in the restructuring;
- take proactive measures to limit the scope of any privilege waiver by ensuring corporate family members with potentially divergent interests have separate counsel; and
- where joint representation is unavoidable, ensure that the terms of such joint representation are carefully limited and account for what will happen to the joint representation should any actual conflicts arise.
B. Data room documents
The use of virtual data rooms to provide multiple stakeholders with quick access to a large volume of documents is commonplace and often essential. This utility comes at a cost, however, as sharing via data rooms any documents that would otherwise be privileged risks waiving the privilege (not only as to those documents but potentially as to other documents sharing the same subject matter as well). Additionally, counsel must fastidiously track which documents have been shared with other parties and which have not, so that they can incorporate that information into a privilege analysis before creating a log. Both speed and credibility are key, and claiming privilege over documents that have been previously shared with adverse parties via data room access serves no purpose.
Given the inherent risks of virtual data rooms, at the outset of a restructuring matter, counsel should:
- work with the client to gain access to and understand the nature and scope of documents included in any data rooms likely to be implicated in the restructuring—including both data rooms related to the restructuring itself and prior data rooms related to mergers or other transactions that might be at issue in the restructuring;
- obtain access logs for all data rooms that might contain relevant documents to confirm which parties had access to the documents in the data room and when; and
- acquire and review copies of any Non-Disclosure Agreements or other binding agreements stakeholders signed as a condition to gain access to a data room in order to identify provisions that can be used to argue against waiver.
C. Communications with third-party advisors
Restructuring matters will often involve communications that include an entity and its investment bankers, auditors, consultants, or other third-party advisors. Some of these communications may be privileged, where the third party’s involvement is directed by counsel or the third party was retained by or to assist counsel. Others may not be, and in those circumstances, the presence of a third-party advisor on an email chain or in a meeting may waive any privileges that would otherwise apply. Privilege waiver issues related to the presence of third-party advisors are of particular concern with regard to board minutes and materials, which are commonly requested in restructuring matters.
Accordingly, counsel should:
- identify all third parties likely to appear in relevant communications or meeting minutes;
- obtain and review copies of the entity’s retention agreements with third parties in order to determine the defensibility of any claim that an advisor’s work on any matter was at the direction of counsel and thus within the scope of privilege; and
- build into the document-review process a screen for email addresses and names associated with known third party “privilege breakers,” to ensure the entity does not waste resources and credibility making indefensible claims of privilege.
D. Communications with board members
Communications between counsel and members of the board are typically eligible for privilege, but outside board members’ status as employees of outside entities (other than the debtor) can complicate privilege assertions and lead to a risk of waiver. To minimize these risks, counsel should:
- take steps to understand all the different communications channels board members use for board business, including personal email accounts or accounts belonging to their other employer; and
- advise board members to guard privileged communications carefully and not share them with others who are not part of the attorney-client relationship (including other individuals at the board member’s employer, such as staff).
E. Restructuring settlement agreements (RSAs)
Communications with interested parties before an RSA is signed are typically not privileged because, during the negotiation period, all parties are necessarily adverse and do not share a common interest. The date on which an RSA is signed, therefore, is important because it very well may be the first moment any type of privilege exists over communications with parties interested in the RSA. But what if portions of the RSA are renegotiated? Tracking is especially important when renegotiation occurs; the common-interest doctrine may protect privilege as to communications regarding the portions of an existing RSA that are not being renegotiated, while simultaneously communications regarding portions being renegotiated might not be privileged. Counsel should:
- keep track of the dates that any RSA or amendments to an RSA are signed;
- where portions of an RSA are renegotiated, keep track of the dates renegotiation began and ended, the entities involved, and the scope of those negotiations; and
- ensure that any assertions of common-interest privilege are consistent with the timing of the parties’ alignment of interests in terms of signing and renegotiating RSAs or portions thereof.
F. Sale or disposition of assets
Bankruptcy litigation moves quickly, and frequently involve sudden sales, transfers, or abandonment of the debtor’s property. Such disposition of assets can result in inadvertent disclosure and, therefore, waiver of privileged material if privileged files or data are unintentionally included in the transfer (e.g., the sale of server equipment without adequate scrubbing of electronically stored information). Counsel should therefore:
- be aware, to the extent possible, of all a debtor’s technology that may contain privileged information, and ensure that discovery counsel is consulted before any technology or equipment is included in a sale or disposition of assets;
- where a sale or disposition of assets could put privileged or confidential information at risk, work with the debtor’s technical personnel to ensure assets are scrubbed of any privileged information before the transfer is completed; and
- consider including language in any sale or transfer agreement providing for the return or destruction upon demand of any electronically stored information inadvertently included in a sale of assets.