Divided Court of Appeals Alters Common Interest Privilege

New York State’s highest court fundamentally altered how business lawyers and their clients should communicate. In Ambac v. Countrywide, 27 N.Y.3d 616 (2016), a divided Court of Appeals held that the “common interest” privilege applies only where: (1) an attorney-client communication shared with a third-party was made in furtherance of a common legal interest held by those parties, and that; (2) such communication relates to litigation, either pending or anticipated. 

How might this affect your business and why does it matter?

Suppose your company wishes to merge with another entity. The diligence process of such a proposed merger requires your company to share highly confidential information with your new partner. Merging companies execute “non-disclosure” and “common interest privilege” agreements as a matter of course in such situations.

Prior to the Ambac decision, the prevailing assumption in the M&A world was that communications exchanged in the course of such mergers is privileged where the parties have executed a common interest agreement. This assumption is no longer safe.

What happened?

In Ambac, the plaintiff sought to obtain approximately 400 communications between Countrywide Homes and Bank of America. Ambac, an insurer who guaranteed payments on certain residential mortgage-backed securities issued by Countrywide, accused Countrywide of fraudulently inducing Ambac to guaranty those securities. Following the subprime mortgage crisis of 2007-09, Ambac sued Countrywide, and also named Bank of America as a defendant on a successor liability theory. The 400 or so communications sought by Ambac took place after the merger between Countrywide and Bank of America was announced but before the deal closed. 

To the surprise of many, the Court of Appeals compelled the defendants to produce the confidential communications despite the existence of defendants’ common interest agreement. 

What does this mean for your New York business?

First, you must now assume that any documents shared outside of the attorney-client relationship will become discoverable in future litigation. It would be wise to separate pre-litigation materials in any deal from materials likely to be responsive to anticipated litigation requests. You should also consider adopting the jurisdiction of another state, such a Delaware, in your deal’s choice of venue provision. 

At a minimum, discuss with your counsel the potential impact of disclosing sensitive documents to the other side of any deal before entering into a non-disclosure or common privilege agreement. Make sure your counsel is aware of the Ambac decision and has considered its potential impact on you.