SOLICITOR-CLIENT PRIVILEGE is a bit like a dormant volcano. It is part of the landscape for corporate lawyers and their clients, who depend on it remaining fairly stable. Three recent court decisions, however, have sent out some fairly significant tremors, and anybody who owns a business or is part of the executive team working on a deal would be wise to pay attention.
The first and most important case has to do with privilege in the context of doing a transaction.
Solicitor-client privilege lies between the lawyer and his or her client, and only the client can waive it. When a business is looking at doing a merger or making an acquisition, it’s normal to make all kinds of documents available to the potential buyer as part of the due diligence process, subject to confidentiality agreements. The sharing of privileged documents in this context has long been considered by the courts to be protected by “common-interest privilege” — the common interest being to get the deal across the finish line.
But in Canada v. Iggillis Holdings, the Federal Court of Canada has put a stop to that. If the decision stands (and it is under appeal), parties to a merger or sale who want to protect their client’s privilege will have to refuse to give prospective buyers access to business-critical legal opinions.
Geoffrey Belsher, managing partner of the New York office of Blake, Cassels & Graydon LLP, says his law firm has been talking to clients about the decision “because we’ve got some transactions on the go right now where we’ve got some real key issues in common-interest privilege and how we handle them. … [Iggillis,] regardless of whether you agree or disagree with it — and we disagree with it,” goes to the fundamentals of transactional law and “your ability to complete corporate transactions,” Belsher says.
Iggillis centred on a legal memo prepared by the buyer’s tax lawyers for a set of commercial transactions involving Abacus Capital, the buyer. The memo was written after emails and telephone calls between the lawyers for both sides regarding “taxation elements of the transaction,” the court notes, and the lawyer representing Abacus circulated it to the sellers’ lawyers to make sure everyone had the same view of the plan and the associated tax and legal risks.
CRA asked for a copy of a legal memorandum. When Abacus refused to hand the memo over to CRA, the agency took the company to the Federal Court to compel them to produce it. Abacus fought back, saying the document was not only privileged, but, if handed over, would provide CRA with “essentially a roadmap” on every way to challenge the tax result of the transaction.
Justice Peter Annis found that, while the memo itself was protected by solicitor-client privilege, the privilege had been lost when the memo was shared with the other parties to the deal. In what has many corporate lawyers extremely concerned, he went on to say that claiming common-interest privilege is being used too often and it helps facilitate commercial transactions that are “of questionable legality.”
“Examples abound,” he wrote. “They may involve placing wealth off shore, or estate planning of wealthy persons, or multinational corporations shifting their costs to high-tax countries and their profits to low-tax countries.”
Douglas Bryce, an M&A lawyer at Osler, Hoskin & Harcourt LLP in Toronto, says the ruling takes an unfriendly, “hostile even” view of business transactions and reverses decades of jurisprudence, treating it as though some judge all those years ago “got to a fork in the road and took a wrong turn, and the last 20 years of case law has all been based on that one mistake.”
He says Iggillis, as it stands now, will fundamentally change M&A practice. “I work on M&A transactions all the time where we open up confidential data rooms where potential buyers of a business are doing a careful due diligence review of the target before committing to paying enormous amounts of money or taking enormous strategic risk,” says Bryce. And some of that material is privileged. If sharing it with a potential counterparty under careful restrictions, confidentiality agreements and such, is going to result in a loss of privilege, “then nobody will share that information going forward.”
That means a potential buyer will not have access to key legal opinions on issues such as a target’s litigation risk, potential competition challenges or tax treatments. Osler is telling its M&A lawyers, unless the decision is overturned, not to assume common-interest privilege anywhere unless it is representing both sides of the transaction.
Patricia Olasker, a senior partner at Davies Ward Phillips & Vineberg LLP in Toronto, says the ruling will be “incredibly disruptive” to getting transactions done. Olasker, who does a lot of M&A work, says strategies for trying to get around Iggillis, when acting for the buyer, include having the lawyers review the target’s legal opinions “but never actually keep a copy in our files and neither would our client,” so if they were ever asked to produce it they could truthfully say they did not have it. “The risk is, the next question would be, ‘Did you see it or discuss it?’ Because clearly privilege has been lost. So these are not bullet-proof solutions; these are frail protections one can resort to until Iggillis gets resolved.”
Carol Hansell of Hansel LLP in Toronto, a governance expert, agrees transactional lawyers will “be much more cautious about written communications” on a privileged issue. “This is a very worthwhile case for executives to be following or having their in-house counsel follow for them. I would alert them to the fact that is something they should keep their eye on, and if they’re in the middle of a transaction, they need to say, ‘Hang on a second, how does this apply?’”
THE OTHER PRIVILEGE case that may affect business people, Canada v. Thompson, has more to do with privilege and privacy. It centres on Alberta lawyer Duncan Thompson, who was in arrears on his taxes. The Canada Revenue Agency tried to force him to produce a list of his income and expenses, assets and liabilities — including a current accounts-receivable listing that would have shown the government the names of his clients.
Thompson handed over most of the documents requested, but balked at the accounts receivable.
Information protected by solicitor-client privilege is normally exempt from disclosure, although the Income Tax Act specifically excludes “an accounting record of a lawyer.” The Minister of National Revenue took Thompson to court to get his accounts receivable. He countered that, among other things, it is privileged because it contains the names of his clients — and they are the only ones who can waive privilege.
The Supreme Court issued its decision in conjunction with a companion case raising similar issues, Canada v. Chambre des Notaires, which challenged the constitutional limits of the Canada Revenue Agency’s reach.
In the Québec case, CRA had issued a notice of requirement to produce documents. The notice went not to the taxpayers but to the Québec notaries representing them. As in Thompson, the CRA wanted documents that fell within the “accounting records” exception. CRA has routinely sent such requirements to notaries acting as legal advisors in Québec in the past few years to get information for tax or audit purposes.
The Chambre des Notaires and the Québec Bar Association argued that the accounts-receivable exception was unconstitutional. The Supreme Court agreed, finding certain sections of the Income Tax Act violated elements of the constitution and were therefore inapplicable to notaries and lawyers as they could result in the disclosure of privileged information “to a far greater extent than is absolutely necessary for the administration of the ITA.” That infringement, the justices wrote, simply “cannot be justified.”
The court said, given the finding, the request made in Thompson “is now foreclosed.”
Hansell says the Supreme Court’s decision is a very good one for C-suite executives because it affirms that “lawyers are not required to disclose the identity of their clients, no matter what the legislation says, because the Supreme Court says it’s unconstitutional.”
The top justices tossed the ball to Parliament to close the accounts-receivable exemption through an amendment to the Act. Failing that, they said that clients “must also be afforded the opportunity to decide whether they wish to contest the disclosure of the information requested by the state,” and if they do want to fight it, they “must be permitted” to make submissions on their own behalf.
Patricia Olasker of Davies Ward suspects that Parliament will move “with extreme caution” before explicitly overriding solicitor-client privilege. It’s a substantive right, she says, and for a legislature to override it for tax-collection purposes would be “a fairly audacious act. You might see it in counter-terrorism legislation, in money-laundering legislation — you can see an overriding public interest there — but for collecting revenue? It does seem to be trammelling on a quasi-constitutional right unnecessarily.”
The first and most important case has to do with privilege in the context of doing a transaction.
Solicitor-client privilege lies between the lawyer and his or her client, and only the client can waive it. When a business is looking at doing a merger or making an acquisition, it’s normal to make all kinds of documents available to the potential buyer as part of the due diligence process, subject to confidentiality agreements. The sharing of privileged documents in this context has long been considered by the courts to be protected by “common-interest privilege” — the common interest being to get the deal across the finish line.
But in Canada v. Iggillis Holdings, the Federal Court of Canada has put a stop to that. If the decision stands (and it is under appeal), parties to a merger or sale who want to protect their client’s privilege will have to refuse to give prospective buyers access to business-critical legal opinions.
Geoffrey Belsher, managing partner of the New York office of Blake, Cassels & Graydon LLP, says his law firm has been talking to clients about the decision “because we’ve got some transactions on the go right now where we’ve got some real key issues in common-interest privilege and how we handle them. … [Iggillis,] regardless of whether you agree or disagree with it — and we disagree with it,” goes to the fundamentals of transactional law and “your ability to complete corporate transactions,” Belsher says.
Iggillis centred on a legal memo prepared by the buyer’s tax lawyers for a set of commercial transactions involving Abacus Capital, the buyer. The memo was written after emails and telephone calls between the lawyers for both sides regarding “taxation elements of the transaction,” the court notes, and the lawyer representing Abacus circulated it to the sellers’ lawyers to make sure everyone had the same view of the plan and the associated tax and legal risks.
CRA asked for a copy of a legal memorandum. When Abacus refused to hand the memo over to CRA, the agency took the company to the Federal Court to compel them to produce it. Abacus fought back, saying the document was not only privileged, but, if handed over, would provide CRA with “essentially a roadmap” on every way to challenge the tax result of the transaction.
Justice Peter Annis found that, while the memo itself was protected by solicitor-client privilege, the privilege had been lost when the memo was shared with the other parties to the deal. In what has many corporate lawyers extremely concerned, he went on to say that claiming common-interest privilege is being used too often and it helps facilitate commercial transactions that are “of questionable legality.”
“Examples abound,” he wrote. “They may involve placing wealth off shore, or estate planning of wealthy persons, or multinational corporations shifting their costs to high-tax countries and their profits to low-tax countries.”
Douglas Bryce, an M&A lawyer at Osler, Hoskin & Harcourt LLP in Toronto, says the ruling takes an unfriendly, “hostile even” view of business transactions and reverses decades of jurisprudence, treating it as though some judge all those years ago “got to a fork in the road and took a wrong turn, and the last 20 years of case law has all been based on that one mistake.”
He says Iggillis, as it stands now, will fundamentally change M&A practice. “I work on M&A transactions all the time where we open up confidential data rooms where potential buyers of a business are doing a careful due diligence review of the target before committing to paying enormous amounts of money or taking enormous strategic risk,” says Bryce. And some of that material is privileged. If sharing it with a potential counterparty under careful restrictions, confidentiality agreements and such, is going to result in a loss of privilege, “then nobody will share that information going forward.”
That means a potential buyer will not have access to key legal opinions on issues such as a target’s litigation risk, potential competition challenges or tax treatments. Osler is telling its M&A lawyers, unless the decision is overturned, not to assume common-interest privilege anywhere unless it is representing both sides of the transaction.
Patricia Olasker, a senior partner at Davies Ward Phillips & Vineberg LLP in Toronto, says the ruling will be “incredibly disruptive” to getting transactions done. Olasker, who does a lot of M&A work, says strategies for trying to get around Iggillis, when acting for the buyer, include having the lawyers review the target’s legal opinions “but never actually keep a copy in our files and neither would our client,” so if they were ever asked to produce it they could truthfully say they did not have it. “The risk is, the next question would be, ‘Did you see it or discuss it?’ Because clearly privilege has been lost. So these are not bullet-proof solutions; these are frail protections one can resort to until Iggillis gets resolved.”
Carol Hansell of Hansel LLP in Toronto, a governance expert, agrees transactional lawyers will “be much more cautious about written communications” on a privileged issue. “This is a very worthwhile case for executives to be following or having their in-house counsel follow for them. I would alert them to the fact that is something they should keep their eye on, and if they’re in the middle of a transaction, they need to say, ‘Hang on a second, how does this apply?’”
THE OTHER PRIVILEGE case that may affect business people, Canada v. Thompson, has more to do with privilege and privacy. It centres on Alberta lawyer Duncan Thompson, who was in arrears on his taxes. The Canada Revenue Agency tried to force him to produce a list of his income and expenses, assets and liabilities — including a current accounts-receivable listing that would have shown the government the names of his clients.
Thompson handed over most of the documents requested, but balked at the accounts receivable.
Information protected by solicitor-client privilege is normally exempt from disclosure, although the Income Tax Act specifically excludes “an accounting record of a lawyer.” The Minister of National Revenue took Thompson to court to get his accounts receivable. He countered that, among other things, it is privileged because it contains the names of his clients — and they are the only ones who can waive privilege.
The Supreme Court issued its decision in conjunction with a companion case raising similar issues, Canada v. Chambre des Notaires, which challenged the constitutional limits of the Canada Revenue Agency’s reach.
In the Québec case, CRA had issued a notice of requirement to produce documents. The notice went not to the taxpayers but to the Québec notaries representing them. As in Thompson, the CRA wanted documents that fell within the “accounting records” exception. CRA has routinely sent such requirements to notaries acting as legal advisors in Québec in the past few years to get information for tax or audit purposes.
The Chambre des Notaires and the Québec Bar Association argued that the accounts-receivable exception was unconstitutional. The Supreme Court agreed, finding certain sections of the Income Tax Act violated elements of the constitution and were therefore inapplicable to notaries and lawyers as they could result in the disclosure of privileged information “to a far greater extent than is absolutely necessary for the administration of the ITA.” That infringement, the justices wrote, simply “cannot be justified.”
The court said, given the finding, the request made in Thompson “is now foreclosed.”
Hansell says the Supreme Court’s decision is a very good one for C-suite executives because it affirms that “lawyers are not required to disclose the identity of their clients, no matter what the legislation says, because the Supreme Court says it’s unconstitutional.”
The top justices tossed the ball to Parliament to close the accounts-receivable exemption through an amendment to the Act. Failing that, they said that clients “must also be afforded the opportunity to decide whether they wish to contest the disclosure of the information requested by the state,” and if they do want to fight it, they “must be permitted” to make submissions on their own behalf.
Patricia Olasker of Davies Ward suspects that Parliament will move “with extreme caution” before explicitly overriding solicitor-client privilege. It’s a substantive right, she says, and for a legislature to override it for tax-collection purposes would be “a fairly audacious act. You might see it in counter-terrorism legislation, in money-laundering legislation — you can see an overriding public interest there — but for collecting revenue? It does seem to be trammelling on a quasi-constitutional right unnecessarily.”
Lawyer(s)
Firm(s)
Blake, Cassels & Graydon LLP
Osler, Hoskin & Harcourt LLP
Davies Ward Phillips & Vineberg LLP
Hansell LLP