Delaware amends rule of evidence to create certainty for international companies with Delaware subsidiaries

The Delaware Rules of Evidence have been amended to provide certainty for international companies seeking attorney client protections. Specifically, Delaware Rule of Evidence (D.R.E.) 502 (a)(1) and (2) now makes clear that attorney client privilege extends protections to the parent companies of Delaware subsidiaries.

What constitutes privileged communications for in-house counsel and outside attorneys is a complex question, the answer to which varies widely across jurisdictions globally. That is because most nations do not have the same broad system of discovery found in the U.S., particularly in civil law jurisdictions that do not provide for pre-trial discovery as part of the fact-finding process. Therefore, international companies that are sued in the U.S. can be denied the attorney-client protections enjoyed by their U.S. counterparts.

With increased globalization, the uncertainty of whether attorney client communications are privileged has become an increasingly thorny problem that carries with it great risk for attorneys and their clients. That is especially true for multinational companies.

My job is to bring international business to the State of Delaware. So, when Lanier Saperstein and Geoffrey Sant, attorneys from the New York office of the Dorsey and Whitney law firm, brought this critical issue to my attention, I sought to create a Delaware-focussed solution.

I reached out to two lions of the Delaware Bar, Jack B. Jacobs, Esq. (now with Sidley Austin) and Myron T. Steele, Esq. (now with Potter Anderson), both former Justices of the Delaware Supreme Court and Vice Chancellors of the Delaware Court of Chancery, for their counsel. I also consulted with Rick Geisenberger, a veteran of Delaware State government who, at the time, headed the Delaware Division of Corporations. (Mr. Geisenberger is now Delaware’s Cabinet Secretary for Finance). I also consulted prominent Delaware attorneys who weighed in on this question and provided support.

We crafted a solution that would make clear that attorney client protections extend to international businesses that own or otherwise control Delaware business entities. This would be accomplished by amending the sections of Delaware’s Rule of Evidence that define “Client” and “Lawyer” as follows: The definition of “Client” would be revised to expressly encompass “officers, directors, and employees of . . . any business entity organized under the laws of any nation other than the United States that owns or controls a business entity that is organized under the laws of this State,” and “Lawyer” to expressly include “persons who are employed or engaged by a business entity, to serve as ‘in house’ counsel to that entity and/or its wholly-owned or controlled affiliates.”

As adopted, this new language would expressly extend attorney client protections to attorneys providing legal advice to a (non-U.S.) parent company of a Delaware subsidiary in the event the wholly-owned or controlled subsidiary were sued in a Delaware court. The official comment to the Rule explains, “D.R.E. 502 was amended in 2017 to clarify that the attorney-client privilege extends to foreign parent entities of Delaware subsidiaries and covers in-house counsel of foreign entities and controlled affiliates.”

The proposed amendment to DRE 502 has been approved by the Trial Procedures Subcommittee of the Delaware Supreme Court Rules Committee, effective January 1, 2018.

To be clear, D.R.E. 502 primarily helps those global businesses whose subsidiaries are sued in a Delaware court. Since plaintiffs get to choose the litigation forum, how does a global company increase its chances that its subsidiaries will actually be sued in Delaware?

There is a clear-cut solution to that question. Global businesses should not only incorporate their subsidiaries in Delaware, but also should operate their businesses here. When a company maintains its operations exclusively in Delaware, it makes it more difficult for other states’ courts to establish general jurisdiction over the subsidiary. This, in turn, makes it more difficult for plaintiffs to force the subsidiary to litigate in states other than Delaware.

Delaware has much to offer international businesses looking to expand in the U.S., everything from a great location—equidistant from NYC and Washington D.C. (about 90 minutes or less from each city)—to top talent and a very attractive cost of doing business.

Delaware’s newly amended rule of evidence is further evidence of the State’s willingness to help global businesses succeed in the U.S., and a compelling reason for global businesses to consider making Delaware their corporate and physical home.