By Britt K. Latham and Erin M. Everitt
Regardless of whether a company acts prudently and responsibly in negotiating a transaction and regardless of whether a deal gets signed and closes or not, a company — particularly a public company — can still find itself involved in litigation that can be very expensive and can drag on for years. Below are a few best practices from a litigator’s perspective that may help reduce the risk of litigation and/or a company’s potential exposure if an unhappy shareholder or potential merger partner files suit.
Think Before You Type: Emails are now the most prominent form of communication between parties negotiating a deal and between colleagues discussing a deal internally. They are real-time thoughts and impressions that often become key exhibits if a lawsuit concerning the deal is filed. In fact, in business disputes, emails now make up a large percentage of the key documents in the case and are often the first documents requested in discovery. The outcome of a particular case may turn on a handful of emails produced in discovery.
Counsel should remind clients negotiating and analyzing a deal that every email and other written statement could become the subject of a document production in litigation. Clients should avoid the use of inflammatory or potentially misleading words or phrases and avoid sarcasm and hyperbole.
Think Before You Speak: Like emails and other written communications, oral statements may become the subject of discovery in subsequent litigation and can have a significant impact. Clients often speak in informal language that may give rise to compelling sound bites if a deal falls through. Such statements often may be misconstrued and create a “he said/she said” fact issue that makes it difficult to prevail on a dispositive motion. Counsel should remind clients of this risk.
Be Aware of Attorney-Client Privilege: The scope of the attorney-client privilege is not nearly as broad as most people think. For this reason, clients should be reminded that merely copying an attorney on a communication does not render the communication privileged. Rather, it is only when a client is communicating with an attorney for the purpose of seeking or receiving legal advice that the privilege likely applies.
Moreover, all too often, clients face a possible waiver of attorney-client privilege because the client forwarded otherwise privileged information to the other party to the transaction, that party’s counsel or a financial advisor. Counsel should remind clients that forwarding privileged communications to the intended deal partner or that partner’s counsel likely waives the privilege for that communication and quite possibly the entire subject matter of that communication. Clients should be reminded that they most likely do not have a relationship that gives rise to an attorney-client privilege until the deal is closed.
Likewise, to the surprise of many executives, communications with financial and other advisors likely are not protected from disclosure in the course of discovery. If a client does intend to engage consultants to assist the client’s lawyers in providing legal advice related to the transaction, that consultant should be engaged by the company’s legal department or outside counsel and the scope of their engagement clearly defined. Even then, the work of such a consultant may not be protected from disclosure.
Regularly Assess the Company’s Insurance Coverage: The risk of litigation exists in most transactions regardless of the company’s actions. Given the costs and legal fees associated with litigation of this sort (i.e., motion practice, lengthy discovery and a possible trial), clients should periodically review and assess the adequacy of entity and director and officer liability coverage. This is especially important if the client reasonably anticipates future transactions that might give rise to litigation.
Given the considerable risk of litigation attendant any merger transaction, employing these cautionary practices from the earliest beginnings of a deal will benefit a client if litigation is filed. As the saying goes, "the best offense is a good defense."
(Britt K. Latham is a Member of Bass, Berry & Sims PLC, focusing his practice on complex business, securities and class action litigation and the representation of clients in connection with internal and governmental investigations. Erin M. Everitt is an attorney at Bass, Berry & Sims PLC, focusing her practice on complex commercial, securities, and class action litigation).