Legal Privilege for Information in August 22, 2011 Investigations - PDF document

Legal Privilege for Information in August 22, 2011 Investigations in Germany Practice Group(s): Corporate Summary Companies conducting internal investigations of potential misconduct often turn to outside counsel in order to maximize the company’s ability to protect the confidentiality of the information developed in the investigation. Under the German Code of Criminal Procedure ( Strafprozessordnung, StPO), information held by outside attorneys is generally protected from disclosure. At the same time, it remains unclear as to what extent individual members of corporate governing bodies can also rely on such protection. This was emphasized by the recent publication of the full text of a ruling of the Regional Court ( Landgericht ) of Hamburg (decision 608 Qs 18/10). The Hamburg decision shows that the improvement amendment of section 160a of the German Code of Criminal Procedure ( Strafprozessordnung, StPO) at the beginning of this year ( see alert of 2 February 2011), which sought to strengthen the applicability of legal privileges, has not solved the issues creating the legal uncertainty. Basic Scenario Corporations often conduct internal investigations to determine whether they or their personnel have breached laws and/or internal company rules. In most cases, corporations turn to external lawyers to perform this work. One reason for that, particularly in cases with potential criminal aspects, is that the confidentiality of information in the care of external attorneys is legally protected. Attorneys have a right to remain silent as a witness ( see section 53 para 1 no. 3 StPO), they enjoy absolute protection against prosecutorial investigation measures (section 160a StPO); conversely, attorneys who disclose confidential information without a prior waiver of privilege will be punishable under section 203 of the German Criminal Code ( Strafgesetzbuch, StGB). The Hamburg judgment referred to above, signals the need for caution about who can rely on the legal privilege protection. In that case, the court approved the seizure of investigation materials in the care of the law firm conducting the investigation. The supervisory board ( Aufsichtsrat ) of a bank had retained an external law firm to conduct an investigation into alleged breaches of duty by members of the management board ( Vorstand ). In the course of the investigation, the law firm interviewed members of the management board and employees and created notes of these interviews. The interviewees were promised confidentiality by counsel conducting the interviews. The public prosecuting authority demanded the interview notes for purposes of its investigations against members of the management board and, when the law firm refused to produce the documents, ultimately succeeded in getting court approval for the seizure of these documents. The primary basis for the decision by the Hamburg court was that there had been no attorney-client or similar relationship under which documents of the law firm could have been protected against seizure pursuant to section 97 para 1 no. 3 StPO. Indeed, recognizing a client relationship not only with the corporation (as represented by the supervisory board), but also with the allegedly implicated members

Legal Privilege for Information in Investigations in Germany of the board of management, would have put the law firm in an untenable position, bringing it close to committing a criminal betrayal of client confidences. The Hamburg court’s decision has not been without controversy, and there are good arguments for contrary positions in both relevant case law and in legal literature. Even though in this particular case it may have been justified to deny privilege protection to the management board members who were themselves subjects of the investigation, the decision touches on a dilemma resulting from the formal distinction between the corporation and the individuals who act as legal representatives of the corporation. Corporations and their governing bodies are legally obligated to investigate potential irregularities and misconduct by corporate personnel. At the same time, the individuals who act as legal representatives of the corporation may be held accountable for such misconduct, if only for a failure to enact adequate internal controls and supervision. Under these circumstances, the relationship between the company, its lawyers, and the individuals acting as legal representatives of the corporation will invariably have a personal element, in which the individual director takes advice from the law firm about how to act in his or her capacity as legal representative of the corporation. This situation was recognized by the decision last year of a local court ( Amtsgericht ) of Bonn (decision 51 GS 557/10) in a case where, during the course of an investigation, the external law firm conducted interviews and consulted with board members who had not been specifically targeted in the investigation. In that case, the court held that the legal privilege extended both to the corporation and to individual board members. The external attorney, who had been released from his confidentiality obligations by the corporation but not by individual board members, successfully invoked the privilege and could not be forced to disclose confidential information about his conversations with the individual board members. It remains to be seen whether other local or regional courts follow the Hamburg decision, and what higher courts will rule in similar cases. In the meantime, advisors must be cognizant of these uncertainties about the protection offered by legal privilege as to information in internal investigations. Practical Recommendations These decisions reaffirm several practical recommendations for those involved in internal investigations: • When conducting an internal investigation, particular care should be taken about defining who the client is. For a corporate investigation, an external law firm will usually be retained by the corporation, meaning that the client is, first and foremost, the corporation. However, the corporate entity acts through its officers and board members. For a stock corporation, that is the management board, and in special cases (in particular vis-à-vis the members of the management board) it can be the supervisory board. After the Hamburg court's decision, it would be prudent for external lawyers not to promise confidentiality to anyone who might be implicated in the subject matter of the investigation. • Interviewees should be informed as to who is a party to the attorney-client relationship. If the corporation is the client, this has to be explained, as well as the fact that the corporation can decide to waive the privilege and release the attorney from his or her confidentiality obligation. 2

Legal Privilege for Information in Investigations in Germany • Finally, the terms of reference for an investigation should accurately reflect the mandate of the external law firm. As a practical matter, the law firm's role in conducting an investigation will always include the provision of legal advice to individuals, in their capacity as legal representatives of the corporation. If this is accurately set out in the terms of reference, it will assist the law firm to argue that a personal element inevitably was part of its job, and that the relationship should be privileged, at least as long as the relevant individual does not become subject to the investigation. Authors: Dr. Wilhelm Hartung wilhelm.hartung@klgates.com +49.30.22.00.29.220 3