Share Purchase Transactions, Solicitor-Client Privilege and Multiple Representations: A Cautionary Tale for Corporate Counsel Case Commentary: NEP ULC v MEC Op Co LLC, 2013 ABQB 540

by Bennett Jones LLP
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An interesting set of questions arises from share purchase transactions regarding the existence of, and parties to, the solicitor-client privilege over the correspondence between the parent, subsidiary and corporate counsel. Solicitor-client communications arise when the parent and corporate counsel obtain information from the target in the context of making the necessary disclosures and representations in the transaction to the purchaser.

The situation is even further complicated if the target incurs obligations as part of the share purchase transaction. If no other corporate counsel is retained to represent the interests of the target in negotiating the share purchase agreement, it is arguable that the parent's corporate counsel was in effect advising the target. As a result, corporate counsel may find himself or herself in an unintended joint retainer.

The potential existence of a joint retainer can pose problems for the parent in protecting solicitor-client privilege over the negotiation correspondence if a dispute arises between the parent and the target (or even the buyer depending on the corporate reorganization of the buyer and the target post-closing) regarding the transaction. After the transaction closes and the parent loses control over the target, the buyer may have a different appreciation of decisions or representations made during the negotiation process.

This article will review the recent decision of Madam Justice Horner in NEP Canada ULC v MEC Op LLC, 2013 ABQB 540 [NEP] which appears to be the only Canadian decision to consider a claim by the parent of solicitor-client privilege over confidential information shared with the target during a share purchase transaction.

The NEP Decision

The facts in NEP were as follows: the defendant, Merit Energy Company LLC was the parent of a wholly-owned subsidiary, MEC Operating Company ULC. The plaintiff, NEP Canada ULC purchased all of the outstanding shares of MEC from Merit. Immediately after closing the share purchase transaction, NEP and MEC amalgamated and carried on business as NEP.

The share purchase agreement contained numerous representations by Merit regarding MEC's finances, liabilities, obligations, and compliance with federal and provincial laws and regulations. NEP claimed that Merit misrepresented certain aspects of MEC's business as part of the negotiations. NEP, MEC and Merit were all parties to the share purchase transaction.

In preparing to close the transaction, Merit transferred electronic data and computers to MEC to allow for its ongoing operations post-closing. This data contained e-mails of numerous MEC and Merit employees. Once the litigation arose, Merit claimed solicitor-client privilege over many e-mails which were in the possession of NEP.

The bundle of e-mails at issue in the application concerned communications to or from Merit's internal and external legal counsel in relation to the share purchase agreement, the representations and other matters.

NEP argued that MEC was party to a common interest with Merit as part of negotiating the share purchase agreement and, as a result, the solicitor-client privilege was shared between MEC and Merit. Based on first principles, neither could claim privilege over the e-mails as against the other. In addition, since NEP and MEC amalgamated post-closing, the privilege remained intact and continued to exist within the amalgamated form – NEP.

Merit denied that such common interest existed and stated that such solicitor-client privilege belonged to it alone. It also advanced an argument based on Tekni-Plex v Meyner and Landis, 674 NE 2d 663, which suggested that if there was a common interest that common interest vanished upon closing when MEC became adverse in interest to Merit.

Madam Justice Horner rejected all of Merit's arguments and held that it was clear to the court that both Merit and MEC sought and received legal advice from the internal and external counsel and shared information between themselves in the common interest of negotiating the share purchase agreement. As such, Merit could not exclude MEC from the e-mails. Further, as NEP was successor in interest by amalgamation, the disputed e-mails were producible to and by NEP.

Implications for Corporate Counsel

Prudent corporate counsel would be wise to turn their attention to the separate legal relationships that may arise as part of share purchase transactions. Special rules of solicitor-client privilege and conduct apply if a lawyer finds him or herself in a joint retainer.

It is a well-established principle that once parties to a joint retainer become pitted against one another in litigation, the confidential communications as between themselves are not privileged and each party is expected to share in and be privy to all communications passing between each of them and their lawyer.1

Additionally, the Professional Code of Conduct has a number of specific rules that govern joint retainers. For instance, no information received in connection with the matter from one client can be treated as confidential as against the others.

Going forward, corporate counsel may consider employing a number of strategies to address the joint retainer concern. For example, communications between the target and corporate counsel could be curtailed to preserve the parent's solicitor-client relationship. Or perhaps the share purchase agreement ought to include a provision to address ownership of the solicitor-client privilege and confidential negotiation information post-closing. The most extreme strategy would be to hire independent counsel for the target as part of the transaction, although this would not be practical for most transactions.

Notes

  1. While Madam Justice Horner used the term "common interest" throughout her decision, it is clear that she found an actual solicitor-client relationship between MEC and the internal and external counsel. As a result, the situation was akin to a joint retainer.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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