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Preserving the Privilege In the Corporate Setting
With government oversight intensifying, internal investigations are an essential tool for companies evaluating whistleblower allegations, as well as an important part of due diligence in preparation for a business acquisition or sale. Assessing the risks and liabilities of a potential transaction requires frank and open communication between the parties, including legal counsel. Understanding the scope and limitations of this privilege in transactional settings and who "holds" it is vital to its preservation.
The U.S. Supreme Court's decision in Upjohn v. United States, 449 U.S. 383, 392-95 (1981), confirmed the attorney-client privilege for business entities. Upjohn extends the scope of the company's privilege to attorney-client communications with managers and directors, and employees. Corporations rely on this privilege when conducting sensitive internal investigations. As the Upjohn court itself noted, an investigation in which corporate attorneys can only talk to managers is unlikely to yield meaningful information. Although Upjohn set the standard for the application of the attorney-client privilege within a corporation, it did not provide guidance on whether, or when, the privilege passes from one corporate entity to another.
When the Privilege Passes to Another Holder
More than 35 years ago, the Supreme Court recognized that the attorney-client privilege can be transferred when the company undergoes a transformation of its status. In Commodity Futures Trading Comm'n. v. Weintraub, 471 U.S. 343 (1985), the Supreme Court held that the corporate attorney-client privilege passes to the bankruptcy trustee, who is free to waive the privilege even over the objections of the former privilege holder — the corporate entity. The Weintraub court focused on the practical implications of the privilege, noting that the duties of a debtor's directors are "severely limited" to turning over corporate property to the trustee and sharing information with the trustee and creditors. The Weintraub court expressed that permitting directors who no longer direct the company to retain the privilege would be of no use to a business entity, nor a corporation or its creditors. See, 471 U.S. at 352-53. It is the trustee who is now responsible for and in control of conducting the business. It will be the trustee's internal investigation that determines what, if any, claims will be brought against prior officers and directors or businesses. Therefore, it is the trustee who should hold the privilege regarding information or analysis by counsel, including those made prior to the bankruptcy. Id. at 353.
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