In Argos Holdings, Inc. v. Wilmington Tr. Nat’l Ass’n, 2019 WL 1397150 (S.D.N.Y. Mar. 28, 2019), a federal court in the Southern District of New York held that the attorney-client privilege was waived when lawyers from Kirkland & Ellis LLP and Simpson Thacher & Bartlett LLP communicated with three directors of a company client. The three directors were also partners in the private equity firm that owned the company. Because hedge funds, venture capital funds, and private equity funds frequently appoint employees or principles from among their own firms to serve on the boards of companies they invest in, this decision is an important reminder that accidental privilege waiver can occur in these types of situations.
In Argos Holdings, the Court distinguished attorney communications with the three directors pertaining to their role as directors from attorney communications with the three directors pertaining to their role as partners in the private equity firm. The Court held that the former communications were protected as privileged whereas the latter communications were not.
Attorney Client Privilege
As the U.S. Supreme Court explained in Upjohn Co. v. U.S., 499 U.S. 383, 389 (1981), the attorney-client privilege exists to encourage open and honest communications between attorneys and their clients. The privilege “shields from disclosure any confidential communications between an attorney and his or her client made for the purpose of obtaining or facilitating legal advice in the course of a professional relationship.” Argos Holdings, 2019 WL 1397150, at *3 (internal quotations marks and citation omitted). The privilege applies where there is a “(1) communication (2) made between privileged persons (3) in confidence (4) for the purpose of obtaining or providing legal assistance for the client.” Restatement (Third) of the Law Governing Lawyers § 68 (2000). The party asserting the privilege has the burden of establishing that the attorney-client privilege applies. Ambac Assur. Corp. v. Countrywide Home Loans, Inc., 27 N.Y.3d 616, 624 (2016). Not all communications with an attorney are privileged. Rather, to qualify for the privilege, the communication must be “generated for the purpose of obtaining legal advice as opposed to business advice.” In re County of Erie, 473 F.3d 413, 419 (2d. Cir. 2007).
Of central importance to the Court’s holding in Argos Holdings, a privileged communication must be made in confidence where the “communicating person reasonably believes that no one will learn the contents of the communication except a privileged person.” Restatement (Third) of the Law Governing Lawyers § 71. Thus, the general rule is that communications made in the “presence of third parties, whose presence is known to the client, are not privileged from disclosure because they are not deemed confidential.” Ambac, 27 N.Y.3d at 624. Privilege will also be waived where a communication is made in confidence but is later shared with a third party. Id; Restatement (Third) of the Law Governing Lawyer § 79.
Kirland & Ellis and Simpson Thacher (the “Law Firms”) represented plaintiffs PetSmart Inc. and its parent Argos Holdings, Inc. (“Argos Holdings”), along with Argos Holdings GP LLC (“Argos GP”), and Argos Holdings, L.P. (“Argos LP”), to provide advice in connection with the 2017 acquisition of Chewy, Inc. (“Chewy”) and the transfer of Chewy stock to Argos Holdings. Argos Holdings, 2019 WL 1397150, at *1. Neither law firm represented the private equity firm BC Partners Inc., which owned a stake in both Argos GP and Argos LP and had designated three directors to the Argos GP Board (the “BCP-Designated Directors”). Following the transaction, plaintiffs filed suit seeking a judgment compelling Wilmington Trust—as Administrative Agent under the credit agreement that financed BC Partner’s acquisition of PetSmart in 2015—to release certain liens on Chewy’s assets and stock, and to release Chewy’s guarantees of PetSmart’s debt. Id. at *1-2.
Following a discovery dispute, the plaintiffs filed a motion for a protective order regarding thirteen sets of documents involving the Law Firms and the BCP-Designated Directors. The plaintiffs did not assert that BC Partners was a client of the Law Firms or that the common interest doctrine protected the communications. Instead, plaintiffs argued that the documents were privileged because the BCP-Designated Directors received the communications in their capacity as Argos GP Board members and because BC Partners—as a stakeholder of Argos GP—was entitled to the same information as its designated directors. Id. at *2.
The defendants opposed the motion, asserting that because the BCP-Designated Directors were also partners in BC Partners, which was not a client of the Law Firms, the privilege had been waived by the presence of a third party to the attorney-client relationship. Id. Defendants also countered that BC Partner’s status as a stakeholder in Argos GP did not automatically encompass BC Partners within Argos GP’s attorney-client privilege with the Law Firms. Id.
The Court’s Decision
The District Court rejected the plaintiffs’ argument that Argos GP’s privilege automatically extended to BC Partners as a stakeholder in Argos GP, finding that the “weight of authority holds that shareholders are not entitled to corporate documents protected by attorney-client privilege absent litigation between the shareholders and the company and a showing of good cause.” Id. at *7 (referring to the so-called “Garner exception”). The Court focused its analysis on whether the BCP-Designated Directors received the challenged communications in their capacity as Argos GP Board members, in which case the communications were privileged, or in their capacity as partners of BC Partners, in which case the privilege was waived. Id. at *4.
With respect to three sets of documents, the Court found that the plaintiffs had carried their burden of establishing that the BCP-Designated Directors had received the communications in their capacity as Argos GP board members. Id. *5. These communications were sent to the entire Argos GP Board (including the BCP-Designated Directors); specifically identified the three BCP-Designated Directors by their relationship to PetSmart or Argos GP rather than their association with BC Partners; or were sent to the BCP-Designated Directors at their PetSmart.com email addresses rather than their BC Partners email addresses. These facts evidenced that the BCP-Designated Directors were acting in their capacity as Argos GP Board members when they received the communications.
By contrast, for the remaining documents the Court found privilege waiver because there were no “indications that the correspondence with the [BCP-Designated Directors] was in connection with their service as directors of Argos GP as opposed to their partnership in BC Partners.” Id. at *6. Perhaps most significant to the Court, the communications were sent only to the BCP-Designated Directors and not to the entire Argos GP Board. Id. In addition, many of the communications referenced the BCP-Designated Directors as the “BCP contact,” used BC Partners or “external” email addresses, and did not appear to have any “particular relevance” to the business of Argos GP as opposed to BC Partners. Id. at *6-7. For these reasons, the Court concluded that the privilege was waived and required production of the documents.
Argos Holdings provides a cautionary tale of accidental privilege waiver—and the steps that can be taken to avoid it. For example, the Court suggested that a “document, protocol or training designed to protect privilege,” id. at *5, would have militated against waiver. Such a protocol could educate designated directors on the risk of forwarding privileged board communications on to their investment firm colleagues and encourage designated directors to use portfolio company email addresses rather than an investment firm email address. Likewise, portfolio companies should encourage their attorneys to send privileged communications to the entire board whenever possible, to use portfolio company email addresses for directors, and to use language clearly delineating communications with directors that relate to their capacity as directors versus their capacity as partners or employees of a shareholder. Finally, portfolio companies and their investment firm shareholders should consider entering into common interest agreements or joint representation where applicable. Undertaking these types of initiatives should go a long way towards avoiding accidental privilege waiver.