Privilege II: Securities fraud and Information Shared as of Contract Execution

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Attorney-client privilege is a thorny issue regardless of deal structure, since neither plaintiff nor funder wants the plaintiff to waive privilege, but the funder wants access to all material information before deciding to fund. In New York giving potential (instead of actual) funders attorney-client privileged information almost certainly creates a waiver. So how can a potential funder have comfort critical information isn’t being withheld as privileged? The securities structure of the model contract should provide some comfort.

Specifically, if during due diligence a plaintiff withheld material information, and that omission caused the plaintiff’s presentation of the securities to be false or misleading, the funder could have securities fraud claims. As a result, if a plaintiff is prepared to use a securities structure and is willing to not disclose information protected purely by attorney-client privilege (as opposed to the less-waivable work product doctrine), the funder should have some additional comfort that the withheld information would not alter its assessment of the investment opportunity in a meaningful way.

Relying in part on that additional comfort, and prioritizing protecting privilege, the contract avoids sharing such information during due diligence (bold added for this post only) and settles the state of information as of contract execution with these representations:

2.1.3 Full Disclosure- The Plaintiff represents that, as of the date of this Agreement, the Plaintiff has provided Funder all material information relating to the Claim, excluding information protected solely by the attorney-client privilege.

2.2.3 Fully Informed: Funder has thoroughly reviewed all the information about the Claim provided to it.

2.2.5 No Waiver of Privilege As of the date of this Agreement, Funder and its Representatives have not disclosed any Common Interest Material to anyone without the prior written consent of the Plaintiff; and [coming in Friday's post on ongoing information sharing]

The plaintiff is advised to require the funder to sign a non-disclosure agreement prior to the start of the due diligence process, and representation is essentially confirmation that such agreement was honored. The provision might require some adjustment if the terms of the due diligence non-disclosure agreement imposed different requirements. Because of 2.1.3, as of the contract execution, “Common Interest Material” in does not include any attorney-client privileged information, though if any is disclosed at any time it is covered in that definition.


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