On December 4, 2014, a New York appellate court overturned a trial court's decision on the application of attorney-client privilege to pre-closing discussions between contractual counterparties, holding for the first time under New York law that documents relating to a pending merger were protected from disclosure by the common interest doctrine (Ambac Assur. Corp. v. Countrywide Home Loans, Inc., 2014 N.Y. Slip Op. 08510, (1st Dep't Dec. 4, 2014)).

The case arises from a lawsuit commenced by plaintiff Ambac Assurance Corporation against Countrywide Home Loans, Inc., alleging that Countrywide fraudulently induced Ambac to insure payments on certain residential mortgage-backed securities. Ambac also brought secondary claims against Bank of America Corp. (BAC), which acquired Countrywide in 2008, alleging that BAC would be liable for any judgment as Countrywide's successor-in-interest.

BAC's acquisition of Countrywide was structured as a merger between a wholly owned BAC subsidiary and a Countrywide entity, Countrywide Financial Corp. (CFC). For a summary of the merger agreement, see What's Market, Bank of America Corporation/Countrywide Financial Corporation Merger Agreement Summary.

Before signing the merger agreement, CFC and BAC entered into confidentiality and common-interest agreements governing all information and material exchanged between them. The merger agreement also required the parties to work together on several pre-closing issues and prepare and file a joint proxy and registration statement. As two heavily regulated public financial institutions, the merger parties required shared legal advice in order to, as the Court put it, "ensure compliance with the law and to advance their common interest in order to successfully complete the merger."

In its lawsuit against BAC, Ambac sought all of these pre-closing communications between BAC, CFC and their counsel on the grounds that they were significant to Ambac's successor liability claims that stemmed from the merger. The referee supervising the discovery granted Ambac's motion to compel production of these pre-merger communications, holding that New York law does not protect communications under the common interest exception to the attorney-client privilege if that common interest does not concern a potential litigation. BAC appealed, but the trial court declined to overturn the referee's order, affirming that the common-interest doctrine only applies if there is pending or reasonably anticipated litigation. BAC appealed again.

The New York appellate court overturned the ruling of the trial court, holding for the first time under New York law that the common-interest doctrine does not require pending or anticipated litigation to overcome the presence of a third party and preserve attorney-client privilege.

As the Court explained, the common-interest exception is intended to encourage "full and frank communication between attorneys and their clients." For the exception to apply, the communications must:

At issue was whether a third condition also exists, that the communications be relevant to pending or reasonably anticipated litigation, which the Court noted had never been squarely decided under New York law. In deciding that New York law should not require this condition, the Court analyzed how New York case law describes the attorney-client privilege itself, and cited to the Restatement of the Law Governing Lawyers, federal and Delaware law, all of which do not require the pending-litigation condition. The Court acknowledged that a line of New York cases does require this criterion, but held that the "better policy" requires moving off that approach.

The Court reasoned that the federal approach "extends logically from the attorney-client privilege," because legal advice is sought precisely to avoid litigation. (For more on the treatment of the common-interest doctrine by the federal courts, see Practice Note, Attorney-Client Privilege: Common Interest Doctrine (Federal).) The Court also acknowledged its guidance on the matter from Delaware, which has codified the common-interest doctrine to include communications by clients, their representatives or their lawyers to a lawyer "representing another in a matter of common interest" (Del. Uniform R. of Ev. 502(b)).

The Court did place limits on the doctrine's application, stating that the communication will remain privileged only so long as its primary purpose is to obtain legal advice or to further a legal common interest. It will not remain privileged, however, if its primary purpose is to obtain advice of a predominantly business nature.

Ambac brings New York's First Department's treatment of the common-interest doctrine in line with the federal and Delaware courts'. The decision thus gives comfort to M&A practitioners advising parties domiciled in New York that they can communicate with their clients in the presence of their contractual counterparts before closing without risking attorney-client privilege.

However, the decision does not address at what stage in the merger process the privilege can begin to overcome the presence of a third party. The case at hand involved communications relating to pre-closing obligations between contractual parties who were bound by their merger agreement. Although the logic of the decision extends to pre-signing discussions (at least those discussions with the bidder who eventually signed the merger agreement), the decision is not explicit that the Court would extend the common-interest doctrine to that early a stage. The decision is also not explicit as to whether the Court would extend the doctrine to communications among advisors to the contractual parties, as opposed to the parties themselves. Here as well, though, the logic of the decision would seemingly extend to advisors.

The decision also does not touch on the issue addressed by the Delaware Court of Chancery in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, C.A. No. 7906-CS, (Del. Ch. Nov. 15, 2013). In Great Hill, the Court of Chancery ruled that in a merger under Delaware law, the attorney-client privilege passes from the acquired corporation to the surviving corporation (see Legal Update, Who "Owns" the Attorney-client Privilege after a Corporate Merger?).

It should also be noted that the decision comes from New York's First Department, and is therefore subject to overturn by New York's Court of Appeals.