Attorneys should keep in mind the importance of preserving the attorney-client privilege during the course of an M&A transaction and understand (and cause the client to understand) which communications regarding the transaction are protected by the attorney-client privilege and what actions may waive the privilege. To the extent feasible, attorneys may also wish to discuss with the client which party will control the attorney-client privilege post-merger. Specifically, if the client is the seller (or a controlling shareholder), depending on the jurisdiction governing the merger agreement, specific steps may need to be taken to ensure that the client will continue to control pre-merger attorney-client privileged communications, and that the privilege does not pass to the surviving entity (and, therefore, to the acquiror).
Who Controls the Attorney-Client Privilege Once the Merger Has Closed
As a general rule, a corporation’s management retains the right to waive the attorney-client privilege regarding certain communications made to counsel and relating to the corporation’s business.1 The U.S. Supreme Court has held that post-merger transfer of the attorney-client privilege depends on the “practical consequences” of the merger, and not on the “formalities of the particular transaction.”2 These “practical consequences” rest on whether the merger results in a change of control of the target corporation. If it does, privilege passes to the surviving corporation with the new management holding the right to assert or waive privilege.3 This is to ensure that the management of the surviving corporation has all the information necessary to continue the operations of the corporation and properly defend any claims against it.
However, transfer of the attorney-client privilege is not always clear. Post-merger litigation regarding the acquisition transaction is common, and oftentimes the surviving corporation may request access to (or be entitled to receive under the terms of the transportation documents) privileged pre-closing communications between the seller (or a former controlling shareholder) and its attorneys relating to the merger or its negotiation. The answer to the question of who controls pre-closing, privileged communications relating to the transaction when the surviving corporation demands access to such communication post-closing depends on the jurisdiction. The two leading jurisdictions are New York and Delaware, with most other states following the rule established by one of these jurisdictions.
Generally, New York law provides that privileged pre-closing communications concerning the target corporation’s general business operations will pass to the surviving corporation’s management when the surviving corporation continues the business operations of the pre-merger entity.4 However, privileged pre-closing communications relating to the merger negotiations do not transfer to the surviving corporation following the merger.5 New York courts reason that granting the new corporation “control over the attorney-client privilege as to communications concerning the merger would thwart, rather than promote, the purposes underlying the privilege.”6 If a seller would have to concern itself with whether a buyer would be able to use pre-merger privileged communications against the seller in post-merger litigation by the buyer, the concern would likely chill attorney-client communication during the transaction.
In considering who may assert the attorney-client privilege post-closing, Delaware courts look first to the Delaware General Corporate Law Section 259, which provides that, after a merger, “all property, rights, privileges, powers and franchises, and all and every other interest shall be thereafter as effectually the property of the surviving or resulting corporation as they were of the several and respective constituent corporations.”7 According to the plain meaning of Section 259, all privileges are transferred to the surviving corporation, including communications relating to the merger itself.8 Delaware courts, however, have held that parties to a Delaware law transaction may negotiate contractual provisions to prevent certain aspects of the privilege, such as privilege regarding any pre-merger communications or communications relating to the negotiation of the merger, from being transferred to the surviving corporation in a merger.9
Merger Communications Protected Under Attorney-Client Privilege
Knowing what happens to pre-merger attorney-client privileged communications relating to the transaction post-merger is only half the battle. M&A attorneys and their clients should also understand what communications are protected by the privilege, and in what circumstances the privilege may be waived. Generally, disclosing privileged communications to a third party will waive the attorney-client privilege. Just like the rules governing post-merger transfer of the attorney-client privilege, the rules governing whether attorney-client communications made in connection with an M&A transaction will remain privileged under the so-called “common interest” doctrine differ from jurisdiction to jurisdiction.
New York’s interpretation of the common interest doctrine requires that, in order to be protected by the attorney-client privilege, communications between clients and their attorneys made in the presence of a third party must be related to pending or reasonably anticipated litigation. Therefore, in the M&A context, the presence of a third party assisting in executing a transaction, such an investment banker or accountant, while clients and attorneys are discussing what would otherwise be considered privileged communications, automatically waives the privilege. It does not matter if the third party was assisting in pursuing a common legal interest (i.e., the merger).
Delaware, on the other hand, sanctions the application of the attorney-client privilege to communications involving the company’s financial advisor in the transactional context.10 Further, where the parties have a “common interest,” the common interest doctrine may prevent the attorney-client privilege from being waived. For parties to have the necessary “common interest,” the “’interest must involve primarily legal issues, rather than relate to a common interest in a commercial venture’” and the disclosure must have been made “’to facilitate the rendition of legal services.’”11
What to Keep in Mind
Attorneys should consider the implications of the rules governing the attorney-client privilege for their deals and their impact on the choices they have to make in protecting communications with clients. In transactions where there is an identifiable client seller (or controlling shareholder) in addition to a target company, attorneys should remember the seller’s (or controlling shareholder’s) perspective, and if communications are important, remember the seller (or controlling shareholder), not the target company, should be treated as the client.
Attorneys should keep in mind the numerous privilege issues that arise both before and after the closing of a merger transaction. It is important to understand the different ways in which privilege could be transferred or waived during the course of the negotiations or after the transaction closes. Attorneys should clearly identify who their client is and should advise and protect the client from third-party access to privileged communications and, in the case of a seller client, from the surviving company’s access to the communications. This can include ensuring that the client takes precautions in keeping attorney communications secured and, in the merger context, separate from all other documents and assets that are transferred to the surviving corporation at the closing.
The attorney should keep in mind that if the target corporation that is privy to attorney-client communications is a Delaware corporation, the surviving entity will gain access to all privileged communication regarding the merger once it has been completed. In order to prevent that, specific carve-out provisions can be placed in the merger agreement that clearly specify that the seller (or controlling shareholder), not the target corporation, is entitled to control the privileged communications post-merger.