Brenda is careful. She marks all privileged communications "PRIVILEGED & CONFIDENTIAL"; she limits distribution of privileged communications to essential personnel; and she makes certain that when privileged communications are shared with third parties there is a clear common or joint legal interest. Despite all of this, the company where she works as senior in-house legal counsel, MegaCorp., now faces the prospect of having privileged communications with Brenda and the external law firm retained by her on behalf of MegaCorp. used against it in litigation arising from a merger transaction that has gone bad.
MegaCorp. is a large U.S. corporation with its head office in Texas. MegaCorp is 100% share owner of several subsidiaries, including in Canada. Over the years, MegaCorp. has sold a number of those subsidiaries. To keep costs down, MegaCorp. requires Brenda to provide legal advice in relation to these transactions to both MegaCorp. and the subsidiary being sold, and to retain a single outside law firm to act for both the parent and the subsidiary.
Among other assets, MegaCorp was the 100% share owner of MiniCorp., an oil and gas company in Alberta, Canada. Roughly two years ago, OmniCorp, another Alberta corporation, proposed a Share Purchase and Sale Agreement (“SPA”) with MegaCorp. for full ownership of MiniCorp. Consistent with MegaCorp.’s policy, MegaCorp. and MiniCorp. both sought and received legal advice from Brenda and the same external legal counsel in relation to the SPA.
MiniCorp was an active business and it was imperative from the purchaser’s perspective that the sale to OmniCorp not disrupt its ongoing operations. To facilitate a seamless transition, MegaCorp. transferred a large amount of electronic data to OmniCorp at the time of the closing.
Immediately after the closing, OmniCorp. amalgamated with MiniCorp., and thereafter carried on business as OmniCorp.
OmniCorp. recently brought an action for damages against MegaCorp. alleging that MegaCorp. breached several representations made by it in the SPA. During the document discovery phase of the litigation, OmniCorp. made it clear that it intended to produce and rely on documents transferred to it by MegaCorp. as part of the closing, including privileged communications between Brenda and/or external counsel and MiniCorp. relating to the SPA (the “Contested Communications”). Brenda knew that these communications were protected by privilege and wondered how OmniCorp. could purport to rely on them. She was even more surprised when a court found that MegaCorp. could not claim privilege over those communications and concluded that OmniCorp. was free to use and rely on them in the litigation.
What went wrong?
The above scenario is based on the facts of NEP Canada ULC v MEC OP LLC, 2013 ABQB 540 [“NEP”] which appears to be the first decision from a Canadian court to consider a dispute over attorney-client/solicitor-client privilege ownership in the aftermath of a corporate transaction.1 In that case, MegaCorp.’s claim of solicitor-client/attorney-client privilege over the Contested Communications was rejected on two principal grounds.
First, the Court found that MegaCorp. and MiniCorp. had sought and received legal advice from both Brenda and the same external counsel, and had shared information between and among themselves in connection with the negotiation and execution of the SPA. As a result, MiniCorp. had rights in respect of the Contested Communications on the basis of a joint or common interest privilege with MegaCorp. At least in connection with the negotiation and execution of the SPA, MiniCorp. was in a attorney-client relationship with Brenda and external legal counsel.
Second, as a result of the amalgamation between OmniCorp. and MiniCorp., MiniCorp.’s pre-closing, pre-amalgamation rights, including its rights in respect of the Contested Communications, remained fully intact and those rights had passed to the amalgamated entity.
The Delaware Chancery Court recently reached a similar conclusion in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLP (Del. Ch. Nov. 15, 2013). In Great Hill, the Court concluded that the absence of contractual a provision specifically excluding attorney-client communications relating to a merger/amalgamation transaction from the assets transferred as part of the sale meant that ownership of those privileged communications relating to that transaction passed to the buyer by operation of the Delaware General Corporation Law (which states that “all property, rights, privileges, powers and franchises” become the property of the surviving corporation).
What could Brenda have done to avoid this situation?
The decision in NEP suggests that this unfortunate (at least from MegaCorp.’s perspective) situation could easily have been avoided through the insertion into the SPA of a clause “under which any rights [MiniCorp.] had to exercise or waive privilege over documents relating to the SPA negotiations would terminate on closing, leaving [MegaCorp.] in sole possession of the privilege.”
Sellers (like MegaCorp.) might want to go one step further, however, in their share purchase and amalgamation/merger agreements by making it a matter of express agreement that privileged documents and communications related to the transaction are not among the Books and Records that are the property of the target, belong to the seller, are not meant to be delivered at closing, and remain the property of the seller even if they are inadvertently disclosed when information systems and records are handed over on closing.
Agreeing that, in any case, privilege is not waived, should provide some protection if a court finds that while not intended to be part of the property of the target, privileged documents and information were nevertheless on the servers or other electronic storage media handed over on closing, and thus disclosed all the same. In certain circumstances, inadvertent disclosure may result in a loss of privilege and, as a practical matter, it may not be possible for the seller to actually excise all privileged communications from the target’s various information systems and back-ups.
What if this had been an asset purchase transaction?
Sellers should take similar precautions in the context of asset purchase transactions. Specifically, the definition of “Excluded Assets” in asset purchase agreements should expressly refer to attorney-client/solicitor-client communications relating to the transaction. Further, like in share purchase or amalgamation/merger agreements, asset purchase agreements should provide expressly that inadvertent disclosure of such communications does not constitute waiver.
Steps should also be taken to ensure that external counsel can continue to act for the seller post-closing
Although not addressed in either NEP or Great Hill, another matter of potential concern for sellers in the context of share purchase, amalgamation/merger or asset purchase transactions relates to the ability of external counsel which acted for both MegaCorp. and MiniCorp. to represent MegaCorp. in the action commenced by OmniCorp. Without a provision by which the buyer (and, if it continues to exist, the target) consents to external counsel acting for the seller in respect of any litigation arising from, in respect of or related to the transaction, the seller risks the expense and inconvenience of having to retain fresh counsel, with little or no background or knowledge concerning the matters in issue, or a motion to disqualify external counsel from acting.
The NEP and Great Hill casesare helpful reminders to transactional lawyers of the critical importance of expressly addressing ownership of attorney-client/solicitor-client privilege communications in their asset purchase, share purchase and merger/amalgamation agreements. Attorney-client privilege/solicitor-client privilege is too important, and the potential perils associated with the loss of that privilege are too great, for ownership issues not to be a part of every corporate transaction checklist.
1 For continuity and ease of reference, the hypothetical company names used above are maintained throughout this article.