Introduction
In mergers and acquisitions (M&A), legal due diligence is a critical phase where the acquiring entity evaluates the legal posture of the target, including litigation exposure, regulatory risk, and intellectual property rights. However, this process frequently collides with the boundaries of attorney-client privilege and work product protection. Buyers often request access to sensitive materials, including patent opinions, litigation strategy documents, or internal legal memos, many of which are traditionally protected from disclosure. Sharing such documents without proper safeguards can result in an inadvertent waiver of privilege, with serious consequences in later disputes or litigation.
To mitigate this risk, many parties utilize the common interest doctrine, which is a legal exception that permits parties with aligned legal interests to share privileged materials without destroying the protections that ordinarily apply. But the common interest doctrine is neither a blanket solution nor without pitfalls. Its successful application requires precise legal structuring and understanding of judicial expectations.
This article explores the doctrinal background of attorney-client privilege in the M&A context, analyzes the nuances of the common interest doctrine, identifies common risks, and offers best practices supported by recent case law and scholarly analysis.
1. The Foundation: Attorney-Client Privilege and Work Product Doctrine
Attorney-client privilege is a long-standing legal doctrine that protects communications between a client and counsel made for the purpose of obtaining or providing legal advice. The work product doctrine, under Federal Rule of Civil Procedure 26(b)(3), provides additional protection to documents and materials prepared in anticipation of litigation. These doctrines serve to encourage candor between clients and lawyers and to ensure that parties can prepare legal strategies without fear of disclosure.
However, these privileges are not absolute. Courts routinely find waiver where privileged documents are shared with third parties who are not agents or necessary participants in the legal strategy.
2. The Dilemma in Due Diligence
In M&A transactions, the buyer’s legal team must thoroughly evaluate the target’s risk profile, including pending litigation, patent disputes, regulatory issues, and compliance matters. Often, the most informative documents are those that are privileged: counsel’s litigation assessments, prior legal opinions, or ongoing litigation strategies.
But when a target company voluntarily discloses privileged documents to a prospective acquirer, courts may find that privilege has been waived, especially if the disclosure was not accompanied by a legal mechanism to preserve confidentiality. This creates a paradox because buyers need information to assess risk, but disclosure of that information can undermine future defenses or litigation positions.
3. The Common Interest Doctrine: An Exception to Waiver
The common interest doctrine allows parties with aligned legal interests to share privileged materials without waiving the protection. The doctrine originated from criminal co-defendant cases but has since expanded into civil and transactional contexts.
Courts generally require three elements to apply the doctrine:
- A shared legal interest between the parties.
- Communications made in furtherance of that legal interest.
- An agreement (formal or informal) to maintain confidentiality.
Importantly, the interest must be legal, not merely commercial or strategic. As the Second Circuit noted in United States v. Schwimmer, 892 F.2d 237 (2d Cir. 1989), the doctrine “applies where a joint defense effort or strategy has been decided upon and undertaken by the parties and their respective counsel.”
4. Commercial vs. Legal Interests
One of the most significant hurdles in applying the common interest doctrine in M&A is that the parties’ interests are not fully aligned until the deal closes. Courts have repeatedly held that sharing documents for purely commercial purposes does not preserve privilege.
For example, in In re Teleglobe Communications Corp., 493 F.3d 345 (3d Cir. 2007), the court explained that “the common-interest doctrine only applies when clients are represented by separate counsel and the communications are made in the course of a joint legal effort.” Similarly, in Cavallaro v. United States, 284 F.3d 236 (1st Cir. 2002), the court found that a shared commercial interest in completing a merger did not suffice.
5. Pre-Closing Communications: A Fragile Safe Harbor
The doctrine may apply even before a transaction closes, but only if the parties can demonstrate that their shared interest is primarily legal. Courts have scrutinized pre-closing disclosures closely. In Carnegie Inst. of Wash. v. Pure Grown Diamonds, Inc., the court emphasized that disclosure of privileged material must be narrowly drawn. And that a recipient might later have a right may not be enough. Carnegie Institute of Washington v. Pure Grown Diamonds, Inc., 481 F.Supp.3d 276, 279-80 (S.D.N.Y., 2020)(“Furthermore, even assuming arguendo that Huron Capital’s cooperation with M7D and TM Capital to solicit investors demonstrates that the parties shared a common legal interest (and that TM Capital’s participation as financial advisor did not waive the privilege, an issue the Court does not reach), Huron Capital also permitted its attorneys’ conclusions to be shared with additional potential investors at the November 7, 2018 presentation. These investors had no common legal interest with Huron Capital or M7D. As a review of the slide deck reveals, TM Capital, M7D, and Huron Capital were still very much attempting to persuade these potential investors of the merits of an investment. The attendees might one day have become co-investors alongside Huron Capital, but at the time that was nothing more than a speculative possibility.”).
6. The Common Interest Agreement: A Practical Safeguard
To protect privilege, many parties enter into a Common Interest Agreement (CIA), distinct from a Confidentiality Agreement (CDA). While a CDA focuses on maintaining business secrecy, a CIA affirms the parties’ shared legal interest and expressly states that disclosures will not constitute a waiver of privilege.
Practical Tip: key provisions should include:
- A recitation of the legal interest shared by the parties.
- A statement that shared information is intended to remain privileged.
- A requirement that all information be kept confidential.
- A clause indicating that the agreement is binding whether or not the transaction closes.
Though not dispositive, a well-drafted CIA can help demonstrate to a court that the parties had a legitimate basis to rely on the doctrine.
7. Caution: Courts Vary in Approach
There is no universal standard for the common interest doctrine. Federal and state courts vary in their application, especially regarding the timing of the agreement, the specificity of the shared interest, and whether litigation must be “reasonably anticipated.”
For example, New York courts generally require that litigation be reasonably anticipated at the time of disclosure. See Ambac Assurance Corp. v. Countrywide Home Loans, Inc., 27 N.Y.3d 616 (2016). In contrast, some federal courts, such as the District of Delaware, apply a broader view and may accept joint legal assessments during merger negotiations as satisfying the doctrine.
8. Litmus Test: “Primarily Legal Purpose”
To survive judicial scrutiny, the party asserting the privilege must show that the dominant purpose of the communication was legal, not commercial. Courts will examine:
- Whether counsel was directly involved.
- Whether the document reflects legal advice or strategy.
- Whether the communication would have been made “but for” the shared legal interest.
Even when a document contains mixed legal and business content, only the legal portion may be protected and only if the overall purpose supports the privilege claim.
9. The Role of Litigation Funding
The doctrine has also been tested in the context of litigation funding. Courts have reached mixed results. Some courts have extended the common interest doctrine to include communications with funders when litigation is contemplated. However, courts such as in MLC Intellectual Property, LLC v. Micron Tech., Inc., 2019 WL 118595 (N.D. Cal. Jan. 7, 2019), refused to apply the doctrine where the funder’s interest was deemed purely financial, not legal.
This analogy is instructive for M&A deals: if the buyer’s interest is viewed as purely commercial, the privilege may not survive.
10. Practical Tips for Transactional Counsel
Given these challenges, counsel on both sides should take proactive steps:
- Involve Legal Counsel Early: Ensure that privileged documents are shared directly between legal counsel and not simply between business executives.
- Use a Common Interest Agreement: Distinct from a CDA, a CIA helps bolster the privilege claim.
- Segment Legal and Business Content: Avoid mixing legal opinions with business assessments in the same document.
- Avoid Over-Disclosure: Limit the scope of shared materials to what is legally necessary.
- Label Documents Appropriately: Use privilege labels and maintain metadata to show intent to preserve confidentiality.
- Document the Purpose: Record internal memos or emails explaining the legal rationale for sharing specific documents.
11. When the Deal Falls Through
Another risk arises when the deal is abandoned. If the transaction fails, courts may question whether the parties ever truly had a shared legal interest. Some courts may even compel disclosure of the shared materials in later litigation. A well-drafted CIA should address post-abandonment confidentiality and expressly preserve privilege regardless of the transaction’s outcome.
12. Conclusion
Navigating the intersection of attorney-client privilege and M&A due diligence is fraught with complexity. The common interest doctrine provides a powerful but narrowly construed tool for preserving privilege. To make it work, parties must align their legal strategies, document their intentions, and carefully draft agreements that reflect the legal not merely commercial purpose of their information sharing. As the case law continues to evolve, counsel should remain vigilant, understanding that the failure to take precautionary steps may expose a company’s most sensitive legal strategies to adversaries in court.
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