DEALMAKERS BREATHE SIGH OF RELIEF AFTER APPEAL COURT RULING ON PRIVILEGED INFORMATION.

Appeal court rules privileged data is shareable

Dealmakers breathed a huge sigh of relief last week when the Federal Court of Appeal ( FCA) gave them the go- ahead to share privileged communications with other parties to a transaction without fear of exposing the information to the Canada Revenue Agency ( CRA) and other third parties.

The unanimous ruling from the three- judge panel overturns a lower court judgment that treated the sharing of such information as a “waiver” of legal privilege, meaning that the communication would no longer be subject to a claim of privilege, or confidentiality, if others sought its production.

“The lower court decision caused considerable concern, as it had the potential to create a significant impediment to transaction execution,” says Alexander Cobb, a partner in Osler, Hoskin & Harcourt LLP’s Toronto office.

Generally speaking, confidential communications about legal matters between lawyers and their clients are subject to privilege. If the communications are disclosed to third parties, however, the privilege is normally treated as waived. The thinking is that disclosure is incompatible with the notion that the communication was intended to be confidential, which constitutes the heart of solicitor-client privilege.

In Canadian law, “common interest privilege” is an important exception to the waiver rule — so far at least.

“An acquirer buying a target subject to a significant lawsuit, for example, might well ask the target to reveal its lawyers’ opinions about the lawsuit’s chances of success,” Cobb says. “Common interest privilege allowed the target to share the documents and maintain their privileged status so that they remained beyond the reach of others, like the plaintiffs in the litigation.”

In the dealmaking context, common interest privilege has been recognized by most of the country’s provincial courts, including Alberta and British Columbia, where the transaction in the FCA decisions took place. Recognition of the privilege was also consistent with previous decisions of the Federal Court and the opinions of leading legal commentators.

“There are no provincial courts who have ruled that transactional common interest privilege doesn’t exist,” says Maureen Littlejohn, a partner in Davies Ward Phillips & Vineberg LLP’s Toronto office. “So Canadian lawyers and their clients have operated for years on the premise that they could share privileged information in furtherance of their common interests.”

Justice Peter Annis’ original decision in the Federal Court, however, created a misalignment in the law.

“In turn, that misalignment created uncertainty for transaction parties, particularly because the Federal Court is where the CRA would go if it was trying to compel a party to produce documents,” Cobb says.

That’s precisely what happened in the case underlying the FCA judgment, which involved a company called Abacus that was acquiring the shares of IGGillis Holdings Inc. The lawyers on both sides produced a joint memo, distributed to their clients and marked “PRIVILEGED & CONFIDENTIAL”, outlining their opinion “on how to buy the shares in the most tax-efficient manner.”

After the deal closed, the CRA sought production of the memo. The companies refused. CRA asked the Federal Court to order production.

“Annis was very skeptical about why parties sought privilege for this information and made some fairly broad comments that people do this to hide something,” Cobb says.

Both the Federation of Law Societies of Canada and the Canadian Bar Association, which intervened in the case, supported the privilege.

“The Bar took great pains to point out that there are a host of reasons why transactional common interest privilege exists, including making transaction execution more efficient,” Cobb explains.

But Annis rejected that rationale. Instead, he concluded that common interest privilege was irreconcilable with the rationale underlying solicitor-client privilege, which had confidentiality as its guiding principle. Sharing the information almost always offended that principle.

Although the FCA overturned Annis’ ruling, dealmakers aren’t out of the woods yet, as the CRA may seek leave to appeal from the Supreme Court of Canada (SCC).

“I think the odds of this case going to the SCC are very high,” says William Innes of Toronto, counsel at Reuters LLP.

But Littlejohn believes that the unanimity in Canadian provincial courts could dissuade the high court from granting leave.

“There are no outlying provinces that say common interest privilege doesn’t exist, and that could provide an incentive for the SCC to turn down the appeal,” she says.

For his part, Innes points to the contrast between Annis’ approach and the one taken by the FCA.

“The Federal Court’s decision entailed a detailed, purposive analysis running to 300 paragraphs whereas the Court of Appeal took a more traditional analysis based largely on provincial precedents,” the lawyer says.

During former Chief Justice Beverley McLachlin’s tenure, the court was often attracted to purposive analysis.

“It will be interesting to see whether the Wagner court ( Richard Wagner is the recently appointed current chief justice) follows the same course,” Innes says. “In my view, the decision could easily go either way.”