Do We Have to Share That Information? Attorney-Client Privilege in the Multi-Entity Context

A bedrock feature of the attorney-client relationship is the privilege protecting legal-advice communications from prying eyes. Confidential communications between a client and her lawyer are protected to a degree not found in almost any other relationship. The same is true even when the client is a corporation—although, as the Supreme Court has recognized, “The administration of the attorney-client privilege in the case of corporations . . . presents special problems.”¹ While a corporation is a person for purposes of the law, it is not a person in the practical sense. An attorney cannot talk directly to a corporate entity; she must speak to the corporation’s representatives. Thus, in the seminal case Upjohn v. United States, 449 U.S. 383 (1981), the Supreme Court held that, in the corporate context, the attorney-client privilege extends to any communication between counsel and a corporate employee that was made for the purpose of obtaining legal advice on behalf of the corporation, regardless of the employee’s seniority within the corporation. And the directors of a corporation generally have a near-absolute right to information concerning the corporation, including privileged information.

But what happens when the same individuals who serve as directors of an entity become adverse or arguably adverse to the entity? In such a scenario, the question of who holds the privilege and who is entitled to access privileged information become more complicated to answer.

Take, for example, the case of a joint venture (“Umbrella Venture”) between two closely held corporations, “Acme Co.” and “Beta Co.” Adams is the owner and a director of Acme, while Brown is the owner and a director of Beta. Both Adams and Brown, on behalf of Acme and Beta, respectively, decide to form Umbrella Venture and become the directors of the new entity. In the course of Umbrella’s business, it enters into contracts with both Acme and Beta. As long as the parties get along, attorney-client-privilege (not to mention competing fiduciary-duty) issues should not arise, despite Adams’ and Brown’s dual roles serving as directors of separate corporate entities. To the extent Umbrella Venture seeks legal counsel, Adams and Brown would both fall within the scope of Umbrella’s attorney-client privilege and be entitled to access all communications, including legal advice, received by Umbrella Venture.

However, as so often happens in corporate relationships (and life), matters can go awry. What if Acme sues Umbrella Venture, alleging breach of the contract between the two entities? Or what if Brown decides that Adams’ actions constitute a breach of his fiduciary duty to Umbrella Venture and wants Umbrella’s counsel to undertake an investigation of Adams? What entitlement to Umbrella’s privileged communications with corporate counsel does Adams, as simultaneous director of Umbrella Venture and owner and director of Acme, have?

The answer may not always be clear. In Delaware, for example, the Court of Chancery recognizes only three limitations on a director’s ability to access privileged information: First, a director’s access can be limited by ex ante agreement. Second, a board of directors can appoint a special (sub)committee of the full board, which would be free to retain separate legal counsel and whose communications with that counsel would be privileged from the remainder of the board. Third, a board of directors “can withhold privileged information once sufficient adversity exists between the director and the corporation such that the director could no longer have a reasonable expectation that he was a client of the board’s counsel.” Kalisman v. Friedman, C.A. No.  8447-VCL, 2013 WL 1668205, at *5 (Del. Ch. Apr. 17, 2013).

If Kalisman applied to our breach-of-contract hypothetical case, Brown might argue that Adams is not entitled to Umbrella’s privileged communications with counsel because Acme’s suit against Umbrella Venture created “sufficient adversity” between Adams and Umbrella Venture. Nevertheless, relying on a determination of “sufficient adversity” could be a risky position, especially in the context of a hotly contested dispute. And the breach-of-fiduciary-duty scenario is even more fraught because the adversity is less clear. Therefore, Brown and the rest of the board would be wise to appoint a special committee to investigate Adams’ conduct so as to better protect the privilege (and the integrity of the investigation).

As always, the better way to prevent Adams from accessing Umbrella’s privileged communications during an investigation or adverse litigation is by having such contingencies already anticipated in Umbrella Venture’s operating agreement—i.e., by forming an ex ante contract about each director’s entitlement to privileged information in the event of adversity arising between a director and/or their respective company on the one hand and Umbrella Venture on the other.

As these examples illustrate, an attorney representing an individual or entity in a messy scenario like this should proceed with caution, examining the operative documents, researching the caselaw in the applicable jurisdiction, and, if appropriate, discussing the scope of privilege with opposing counsel as soon as possible. Perhaps more importantly, though, attorneys who assist with the drafting of such corporate documents should include provisions that govern corporate privilege with the understanding that even the best-laid plans of corporations and men often go awry.