3Com Corp. v. Diamond II Holdings, Inc., C.A. No. 3933-VCN (Del. Ch. May 31, 2010) (Noble, V.C.)

In this letter decision on competing motions to compel, the Delaware Court of Chancery again confirmed that Delaware recognizes that the attorney-client privilege is not necessarily waived when a client communicates with its attorneys in the presence of its investment banker, particularly in the context of a pending transaction.

The underlying action was a breach of contract case involving a termination fee that was purportedly owed as a result of the failed merger of plaintiff 3Com and defendant Diamond II Holdings, Inc. In the course of discovery, each side had withheld or redacted documents on privilege grounds. Because of a threshold dispute as to whether Delaware or Massachusetts law governed privilege questions with respect to certain communications, the Court looked to the Restatement (Second) of Conflict of Laws (1971), § 139(1) to conclude that Delaware had the most significant relationship with the communications at issue. Even though the communications took place largely in Massachusetts, the parties had selected Delaware law to govern the merger agreement, and had chosen Delaware as the forum for any disputes arising out the merger agreement.

In concluding that the presence of 3Com’s investment banker on communications with 3Com’s attorneys did not waive privilege, the Court cited Jedwab v. MGM Grand Hotels, Inc., 1986 WL 3426, at *2 (Del. Ch.) for the proposition that “Delaware courts have applied the attorney-client privilege to protect communications disclosed to the client’s financial advisor in the corporate transactional context,” and distinguished Baxter Int’l., Inc. v. Rhone-Poulenc Rorer, Inc., 2004 WL 2158051, at *4 (Del. Ch.) on its facts. Specifically, the Court noted that Baxter involved a dispute over royalty payments, and that the email communications at issue in Baxter were sent by in-house counsel of the non-moving party to an independent auditor who had been retained to confirm the precise amount of the payments. The Court noted that “Baxter is of limited value in the corporate transactional context where, as here, a party discloses otherwise privileged information to its own financial advisor and not an independent auditor.”

The application of the attorney-client privilege to emails among and between 3Com’s investment bankers in which no 3Com attorney was copied was also challenged. The Court, however, declined to categorically determine that such documents were not privileged, because of the possibility that the investment bankers were discussing or passing along 3Com’s legal advice to each other, and that such subsequent disclosure, if confidential, would not operate to waive the privilege because only the client may effectuate a waiver. The Court stated that in camera review of specific documents would be appropriate if the privilege designations were challenged.

The Court also held that, in light of the parties’ impasse, a document-by-document in camera review was the appropriate means of ruling on the privilege designations of certain documents falling into the following categories: communications of a 3Com executive who served in both a legal and business capacity; communications of that same executive with 3Com’s investment banker; and documents in which handwritten notes of non-attorneys were redacted. Finally, the Court also held that in camera review was appropriate to determine whether the common interest privilege was applicable to communications between two companies whose interests were aligned with respect to the closing of the merger, yet adversarial with respect to the operation of the termination provision.

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