In 3Com Corporation v. Diamond II Holdings, Inc., C.A. No. 3933-VCN (May 31, 2010), read letter ruling here, the Court addressed cross motions to compel which raised issues of work product immunity, attorney/client privilege and the “common interest” privilege in an action involving alleged breaches of a transnational merger agreement and application of the termination fee provision. This summary was provided by Kevin F. Brady of Connolly Bove.
3Com Corporation had entered into a merger agreement (which included a provision for a $66 million termination fee) with Diamond II Holdings, Inc. (“Newco”), an acquisition vehicle formed by Bain Capital Partners LLC. The acquisition was to be joined by Huawei Technologies Co. Ltd. and its affiliates, China-based companies, which were to acquire a stake in the new company. However, due to the involvement of foreign entities, to consummate the merger, the parties had to get Presidential approval which included a recommendation from the Committee on Foreign Investment in the United States (“CFIUS”). The parties submitted a notice of the merger but CFIUS subsequently informed the parties that it would not recommend approval of the merger so the parties withdrew the notice and terminated the merger.
3Com thereafter filed this action to recover the termination fee and moved for summary judgment. Newco responded to the motion by requesting discovery. Because the Court had to decide whether the termination fee “could be ascribed a purpose different from that endorsed by 3Com,” the Court permitted discovery under Court of Chancery Rule 56(f). The parties subsequently produced documents which lead to the filing of cross-motions to compel.
As an initial matter, because the law of privilege is substantive and not procedural, the cross-motions to compel raised choice of law questions as to whether the substantive law of Delaware or Massachusetts regarding privilege would apply. After an in-depth choice-of-law analysis invoking the “most significant relationship test” of the Restatement (Second) of Conflict of Laws (1971) and the internal affairs doctrine, the Court determined that the law of Delaware should apply.
Newco challenged 3Com’s decision to withhold merger communications between it and its attorneys that involved its investment banker, Goldman Sachs. Newco also challenged blanket assertions of privilege and work product regarding communications involving Goldman Sachs and Neal Goldman, 3Com’s Executive Vice President, Chief Administrative and Legal Officer, and Secretary, who acted as 3Com’s general counsel during the merger negotiations and 3Com’s chief negotiator for the transaction. 3Com challenged, among other things, the assertion of a “common interest” privilege for communications between Newco and Huawei.
Under Delaware law, the attorney/client privilege is extended to protect communications disclosed to the client’s financial advisor in the corporate transactional context. Indeed, in Jedwab v. MGM Grand Hotels, Inc., 1986 WL 3426 at *2 (Mar. 20, 1986), the Court of Chancery explained that “where a client seeks legal advice as to the proper structuring of a corporate transaction and it is also prudent to seek professional guidance from an investment banker, it would hardly waive the lawyer-client privilege for a client to disclose facts at a meeting concerning such transaction at which both his lawyer and his investment banker were present.” As a result, the Court stated that if Goldman Sachs was included in communications between 3Com and its attorneys involving legal matters, those communications would be privileged.
Another dispute which is very common in this setting dealt with Mr. Goldman, who served as 3Com’s legal counsel or business negotiator during its discussions regarding the merger. In order to resolve this dispute, the Court had to decide whether the internal communications between a company’s officers and directors and its general counsel were privileged. Because this would require a detailed factual analysis, the Court ordered an in camera review.
With respect to 3Com’s challenge to the assertion of the attorney-client privilege by Newco with respect to certain communications between Newco and Huawei, Newco responded that Bain and Huawei had signed a Termination Fee Side Letter which made reference to limited guarantees provided to 3Com by both a Bain affiliate and Huawei regarding the termination fee. In particular, the Side Letter provided that in the event that either Bain or Huawei’s conduct (or lack thereof) caused the fee to be owed, the party that acted wrongfully would reimburse the other for it’s pro rata obligation.
Rule 502(b) of the Delaware Rules of Evidence extends the attorney-client privilege to certain communications made by the client, his representative, or lawyer, to a lawyer “representing another in a matter of common interest.” In the transactional context, “common interest” has been defined as an interest “so parallel and non-adverse that, at least with respect to the transaction involved, [the two parties] may be regarded as acting as joint venturers.” Here the Court identified both common interests of those parties (when seeking CFIUS approval of the merger) and adverse interests (when negotiating the Side Letter). As a result, the Court decided to review in camera the challenged documents.