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March 20, 1986


The opinion of the court was delivered by: Allen

ALLEN, Chancellor

The amended complaint in this class action brought on behalf of all owners (other than defendants) of the preferred stock of MGM Grand Hotels, Inc. ("MGM Grand") seeks, together with other relief, to enjoin a proposed merger between MGM Grand and Bally Manufacturing Corporation or an entity controlled by it ("Bally"). Plaintiff's application for a preliminary injunction is scheduled to be heard on March 31, 1986 and in preparation for that event, discovery has been proceeding in the matter in a fairly intensive way. Pending currently before the Court is plaintiff's motion to compel Bally to produce certain documents withheld under a claim of attorney-client privilege and pursuant to the qualified immunity from discovery provided by the work-product doctrine.

Broadly speaking, the current motion raises two legal issues. The first question is whether, in the circumstances of this case, the lawyer-client privilege extends to documents prepared by an attorney representing one party to a proposed merger transaction when those documents have been provided to the other party to the transaction or to his attorney. Bally relies upon the language of Rule 502(b) of the Delaware Rules of Evidence in support of its contention that such documents are privileged.

The second legal issue here presented is whether drafts of documents, the final versions of which have been filed with the Securities and Exchange Commission are properly discoverable in this case.

I turn first to Bally's claim that our evidence Rule 502(b) has application in this case. That Rule provides in pertinent part as follows:

A client has a privilege to refuse to disclose and to prevent any other person from disclosing confidential communications made for the purpose of facilitating the rendition of professional legal services to the client...(3) by him or his representative or his a lawyer or a representative of a lawyer representing another in a matter of common interest....

In connection with the negotiation and documentation of the merger agreement that forms a part of the subject matter of this litigation, legal counsel for MGM Grand and Bally have communicated not only with their own clients but with the lawyers for the other parties to the transaction. Documents reflecting communications between Bally's lawyers and MGM Grand's lawyers are now sought by plaintiff and resisted by Bally on the theory that the quoted language of Rule 502(b) protects such documents from production. The "common interest" that is asserted as justifying this expansion of the lawyer-client privilege beyond what I take to be its traditional bounds is the proposed merger itself. Bally contends that all parties to the merger have an interest in seeing the transaction effectuated.

I am unpersuaded that Bally's claim of privilege is well founded. I find it unnecessary here to restate the elements of the client's privilege to protect communications with his lawyer from public disclosure. See, Texaco, Inc. v. Phoenix Steel Corporation, Del. Ch., 264 A.2d 523 (1970). Suffice it for the moment to say that an essential condition for the successful invocation of the privilege is that the matter sought to be protected be confidential.

Whether disclosure of a communication beyond the client and lawyer destroys the basis for the claim of privilege or not inevitably involves a judgment as to whether in the circumstances the person making the disclosure in fact regarded that disclosure as confidential and, if there was an expectation of confidentiality, whether the law will sanction that expectation. Thus, for example where a client seeks legal advice as to the proper structuring of a corporate transaction and it is also prudent to seek professional guidance from an investment banker, it would hardly waive the lawyer-client privilege for a client to disclose facts at a meeting concerning such transaction at which both his lawyer and his investment banker were present. Knowledgeable participants in such transactions would themselves regard disclosures at such a meeting as confidential and the law would, in my opinion, tend to validate that judgment.

Rule 502(b) is a recognition that a disclosure may be regarded as confidential even when made between lawyers representing different clients if in the circumstances, those clients have interests that are so parallel and non-adverse that, at least with respect to the transaction involved, they may be regarded as acting as joint venturers. The classic case of this kind would be communications relating to the defense of a lawsuit among lawyers for co-defendants. See, 3 Jones on Evidence § 21:20 (1972).

I regard Bally's claim of privilege in this instance as ill-founded because I cannot conclude that communications between its attorneys and attorneys for MGM Grand with respect to the negotiation and documentation of the proposed merger possessed the requisite confidentiality in these circumstances. With respect to the functions they were performing when the documents sought were prepared, these lawyers obviously represented clients with adverse interests. The fact that both Bally and MGM Grand are defendants in this lawsuit does not render documents relating to the negotiation of the transaction itself confidential. If there is no basis for a finding of confidentiality, there is no basis for the lawyer-client privilege.

Bally also asserts the qualified immunity from discovery afforded to documents prepared in anticipation of or for trial as a basis to resist production in this instance. See, Chancery Rule 26(b)(3). I assume for purposes of deciding this claim that this litigation was either pending or anticipated at the time the communications in question were prepared. Nevertheless, I conclude that the work-product doctrine has no proper application in this setting. There has been no showing or even suggestion by Bally that the communications in issue relate to the development of a factual record with respect to this litigation or the development of strategies in that connection. So far as appears from the present record these communications relate to the negotiation and documentation of the underlying transaction. Thus, it would stretch the language of Rule 26(b)(3) and the underlying theory of this immunity (see, Hickman v. Taylor, 329 U.S. 495 (1947)) too far to protect on this basis documents relating to the evolution of the terms of the underlying transaction itself.

I turn now to a Discussion of the legal issues arising from the assertion of privilege with respect to preliminary drafts of documents later versions of which have been filed with the Securities and Exchange Commission. For the reasons that follow, I conclude that such drafts are the proper subject of a claim of privilege and thus need not be produced.

An appropriate analysis of this issue begins, in my view, with an attempt to focus on what information may be derivable from such drafts. Since plaintiff has available to it the publicly-filed documents, it is apparent that the only information available from prior drafts relates to matters appearing in prior drafts that were deleted, augmented or otherwise modified in the final product. Even a superficial understanding of the process by which SEC filings are prepared by lawyers and other advisors of a client permits one to understand that such modifications are made as a result of communications between a client or its representatives and its lawyers. Thus, new information disclosed from comparing drafts of SEC filings with the filed documents themselves necessarily relates to and may inferentially disclose communications between a client and its lawyers charged with preparing the final documents. ...

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