Monday, December 17, 2012

What is Attorney-Client Privilege and How Does It Apply to Start-Ups?

Attorney-client privilege applies to communications between clients and their attorneys and is believed to be the oldest protection of confidential information in the Anglo-Saxon law. The purpose of this privilege is to encourage the client to talk frankly with his or her attorney, so that the attorney can offer the best legal advice. But, as typical in the law, there are limitations and exceptions. Let’s consider when communications between attorneys and their start-up clients are confidential and when they are not.

During the company formation process, it is important to be clear from the outset who the client is: the individual founder(s) or the company that is being formed. Attorney-client privilege can apply when the client is a company. In such cases, the corporate attorney-client privilege protects the corporation, not its individual owners/employees. Communication between the attorney and the employees, officers or directors of the company is protected so long as such communication (i) was made at the direction of the corporate officials, (ii) the matters discussed were within the employee’s duties and were not available from the upper level employees, (iii) the purpose of the inquiry was to obtain legal advice, and (iv) the communication was intended to be kept confidential. Since corporate attorney-client privilege does not protect the individuals, employees should be careful in communicating with the company counsel if disclosure of certain information may expose them to personal liability.

So, when hiring a lawyer to form a company, make sure that the engagement letter is between the attorney and the company, not the individual founders. Also, it is helpful to add a paragraph to the engagement letter listing the individual employees who are authorized to communicate with the attorney and give him / her instructions.

Representing the company and an individual founder at the same time may present a conflict of interest, especially if the board of directors of the company later decides to fire the founder. It is advisable for each of the founders to hire their own attorney when negotiating the ownership structure and the operating or the shareholders agreement. Since this can get very expensive, typically founders hire one attorney who serves as the company lawyer during the formation process.

Note that attorney-client privilege only applies to legal and not to business or other type of advice. So, when the attorney is acting primarily as a member of the board of directors of the company or as a human resources manager rather than as an attorney, the privilege does not apply. The privilege protects the communication, not the underlying factual information. Also, there is no protection for any communication made in furtherance of a crime or an illegal act. Finally, the attorney-client privilege may be waived if the communications are shared with other parties (for example, when the founder copies others on the email to the corporate counsel or invites others who are not employees, officers or directors to participate at a meeting with the company’s counsel).

This article is not a legal advice, and was written for general informational purposes only.  If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author, Arina Shulga.  Ms. Shulga is the founder of Shulga Law Firm, P.C., a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of business, corporate, securities, and intellectual property law.

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