Chapter 6 Corporate Clients

• Library: A Virginia-Specific Summary Guide: Attorney-Client Privilege & Work Product Doctrine (Virginia CLE) (2016 Ed.)

Chapter 6

CORPORATE CLIENTS

6.1 INTRODUCTION

The attorney-client privilege in the corporate context implicates a number of often subtle and complicated principles. [6.101]

Every court agrees that corporations can enjoy privilege protection for certain communications with their lawyers. [6.102]

However, most courts apply a heightened level of scrutiny whenever a corporation claims privilege protection. [6.103]

6.2 DEFINING THE "CLIENT" WITHIN A CORPORATE ENTITY

As in every situation, lawyers must properly identify the "client" in the corporate context. [6.201]

The law's "default" position is that the "client" in a corporate setting is the incorporeal entity itself. ¹ However, with an explicit agreement, lawyers can instead enter into an attorney-client relationship with a corporation's consultant or component, such as the board of directors, a subset of the board such as a special committee, etc. [6.202]

Lawyers representing a corporate entity do not automatically represent its owners, although in the case of a closely held corporation it can be difficult to distinguish between a representation of the entity and of its owners. [6.203]

6.3 COMMUNICATIONS WITHIN A CORPORATE FAMILY

Within a corporate family, lawyers must also define the "client." [6.301]

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Most courts find that the privilege protects communications between a corporation's lawyers and employees of wholly owned corporate affiliates. [6.302]

• Examples include: corporations related through common ownership and control; a corporation's wholly owned subsidiary; the 90-percent owner of an affiliated entity; wholly owned or majority-owned subsidiary; three grandchild subsidiaries for which the parent took legal responsibility; subsidiary making disclosures to its parent (without reference to the percentage ownership); affiliated corporation; parent corporation, subsidiaries, and affiliates; related corporations.

Some courts take a narrower approach, and either require lawyers to jointly represent those corporate affiliates to earn privilege protection, or protect only communications in which the corporate affiliates share a common legal interest. [6.303]

Lawyers can maximize privilege protection by jointly representing corporate affiliates, or entering into a common interest agreement if the other affiliates have their own lawyers—but those arrangements implicate conflicts of interest and other ethics issues. [6.304]

6.4 EFFECT OF CORPORATE STOCK TRANSACTIONS

Corporate transactions involving the sale of a corporate affiliate's stock involve privilege implications. [6.401]

Nearly every court recognizes that the sale of a corporation's stock to a new owner does not change the identity of the lawyer's "client"—the corporation itself.

Lawyers who jointly represent a corporate parent and an affiliate in the latter's sale or spin-off can face standard joint representation issues (discussed in Chapter 5 and 24). [6.402]

• Those can include the requirement to share lawyers' files with the newly-independent affiliate (now a former joint client), and the possibility of being disqualified from representing the parent in a dispute with its former affiliate.

Other rules and statutes might also apply in this setting. [6.403]

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• Some state laws govern the ownership of files after such transactions.

6.5 EFFECT OF CORPORATE ASSET TRANSACTIONS

The sale of a corporation's assets also implicates privilege principles. [6.501]

Most courts formerly followed what is called the "bright-line" test, under which the sale of corporations' assets did not transfer the privilege's ownership to the assets' purchaser. [6.502]

•	This contrasted with the sale of corporations' stock.
VA	The Eastern District of Virginia 2 held that the transfer of assets does not transfer privilege ownership.

In recent years, courts have increasingly applied what they call the "practical consequences" test—under which the privilege can transfer to the assets' purchaser. [6.503]

• This approach began in the context of a purchaser buying substantially all of a bankrupt company's assets and continuing in the same business, but now has spread to more ordinary transactions.

6.6 REPRESENTATION OF CORPORATE AFFILIATES IN THE TRANSACTION

Lawyers' joint representation of a corporate parent and an affiliate in the former's sale of the latter's stock or assets can have dramatic consequences. [6.601]

In a number of cases, lawyers representing corporate parents have unsuccessfully argued that they did not also jointly represent the affiliate whose stock or assets the parent sold. [6.602]

• This failure resulted in the ability of the affiliate's purchaser (or the bankruptcy trustee succeeding to the bankrupt

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affiliate's privilege rights) to access the joint lawyers' files related to the transaction.

6.7 AGREEMENTS ALTERING THE PRIVILEGE'S OWNERSHIP

Some courts have stated that lawyers can alter these general principles by adding provisions in stock or asset transactional documents. [6.701]

Courts generally recognize that lawyers can avoid a joint representation of the parent and the affiliate whose stock or assets are being sold, which eliminates the joint representation implications (including the affiliate's later access to the lawyer's files). [6.702]

VA The Eastern District of Virginia ³ held that parties to an asset transaction can vary the privilege's ownership in their agreement.

Courts have also suggested other possible steps to alter the general rules, such as excluding power over the privilege from the assets being sold, or adding a prospective consent to any transactional documents. [6.703]

• Other courts have held that such parties generally cannot control the privilege's ownership, which is instead governed by operation of law.

The transfer of privileged communications to a corporation's buyer in a sale transaction usually does not waive either the seller's or the buyer's privilege protection. [6.704]

VA The Eastern District of Virginia ⁴ suggested that a corporate parent might be able to contractually retain the right to veto a spun subsidiary's waiver of the attorney client privilege.

Unfortunately, most of these judicial suggestions about altering the privilege's ownership have not actually been tested in later litigation. [6.705]

• So it remains uncertain whether lawyers representing transactional parties can assure different treatment of the privilege after such transactions.

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6.8 BANKRUPT AND DEFUNCT CORPORATIONS

Corporations' bankruptcy or dissolution has privilege implications. [6.801]

Under the general rule, the entity stepping into the shoes of management generally controls the privilege when companies declare bankruptcy. ⁵ [6.802]

• Examples include: trustee in bankruptcy, receiver for an insolvent corporation, bankruptcy trustee of a bankrupt limited partnership, debtor-in-possession, liquidating trust, liquidator for an insurance company, FDIC as a bank receiver.

Courts disagree about whether defunct corporations can assert any privilege. [6.803]

• That question becomes important if an adversary seeks privileged communications from some third party such as the law firm, which had represented the now-defunct company.

Courts have also discussed whether the privilege survives bankruptcy committees' disbanding. [6.804]

6.9 SEPARATE AND JOINT REPRESENTATIONS OF EMPLOYEES

Given the unique nature of the corporate context, courts have addressed lawyers' ability to jointly represent a corporation and its employees. [6.901]

Determining whether lawyers jointly represent any multiple clients implicates privilege principles, because...