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By: Ari M. Berman and Laurel S. Fensterstock VINSON & ELKINS LLP
Private equity investments often present complicated questions concerning the attorneyclient privilege, ranging from the interactions between a private equity firm and its portfolio companies to communications with the private equity fund’s investors. It is important for in-house counsel at private equity firms to understand what communications likely will be protected and under what circumstances the privilege may be considered to have been waived.
THIS ARTICLE IS INTENDED TO PROVIDE A HIGH-LEVEL overview of the attorney-client privilege, identify issues that in-house counsel at private equity firms are likely to face, and provide practice tips for enhancing your chances of preserving the privilege.
The attorney-client privilege is the oldest among the common law evidentiary privileges and protects confidential communications between a client and its attorney made for the purpose of obtaining or providing legal advice. (Courts’ analyses of the attorney-client privilege vary according to state and there can be important, and outcome determinative, differences among states. This article is intended to provide a general overview of key principles associated with the privilege as well as those principles’ application within the private equity context.) The purpose of the privilege is to encourage full and frank dialogue between lawyers and clients, and communications protected by the privilege need not be disclosed in litigation. Upjohn Co. v. United States, 449 U.S. 383, 389, 101 S. Ct. 677, 682, 66 L. Ed. 2d 584 (1981); Spectrum Sys. Int’l Corp. v. Chem. Bank, 78 N.Y.2d 371, 377, 581 N.E.2d 1055, 1059 (1991).
To be privileged, a communication essentially must be primarily or predominantly of a legal—rather than a business—character. The critical inquiry is whether the communication was made in order to render legal advice or services to the client. Spectrum Sys. Int’l, 581 N.E.2d at 1061. A communication will be protected where it concerns legal rights and obligations and demonstrates other professional skills, such as a lawyer’s judgment and recommended legal strategies. Rossi v. Blue Cross & Blue Shield of Greater N. Y., 73 N.Y.2d 588, 594, 540 N.E.2d 703, 706 (1989).
As a general matter, courts tend to scrutinize more closely communications with in-house counsel than outside counsel— guided by the principle that the privilege is not meant to be used as a shield to protect otherwise discoverable information. This is due primarily to the fact that in-house lawyers often have mixed legal and business responsibilities and can wear multiple hats, including serving as company officers. During their day-to-day interactions, in-house lawyers often walk the line between legal and non-legal involvement in company affairs—and that line can easily, and inadvertently, get blurred. Courts have warned that the mere participation of an in-house lawyer does not automatically protect communications from disclosure. Rossi, 540 N.E.2d at 705.
In the private equity context, issues relating to the attorney-client privilege may arise in various scenarios, including when (1) a private equity firm’s employee plays multiple roles, (2) one lawyer or law firm represents two clients, (3) clients share a common legal interest, and (4) there is a sale of a portfolio company.
To read the full practice note in Lexis Practice Advisor, follow this link.
Ari M. Berman is a partner at Vinson & Elkins, LLP. His main area of practice is commercial litigation, with an emphasis on lawsuits involving the federal securities laws. He has significant experience representing companies and individuals—including public companies, financial institutions, private investment funds, and officers and directors—in contexts such as investigations and enforcement proceedings by the SEC, FINRA, and other law enforcement and regulatory agencies. Laurel S. Fensterstock is a commercial litigator whose practice focuses on complex business disputes in both state and federal courts, including breach of contract, intellectual property, securities litigation, and bankruptcy litigation. She also has experience representing clients in foreign arbitrations and internal investigations
For assistance in drafting a side letter to be used when forming a private equity fund, see
> SIDE LETTER FOR A PRIVATE EQUITY FUND
RESEARCH PATH: Corporate and M&A > Private Equity > Fund Formation and Operation > Forms
For more information on fee and expense disclosure and documentation for private equity funds, see
> PRIVATE EQUITY FEE AND EXPENSE DISCLOSURE
RESEARCH PATH: Corporate and M&A > Private Equity > Fund Reviews and Limited Partner Negotiations > Practice Notes
For an overview of the various remedies that investors typically negotiate for when investing in a private equity fund, see
> INVESTOR REMEDIES
RESEARCH PATH: Corporate and M&A > Private Equity > Fund Formation and Operation > Practice Notes