In Shareholder Representative Services LLC v. RSI Holdco, LLC, the Delaware Court of Chancery held that the sellers of a target corporation retained the right to assert attorney-client privilege over pre-merger communications with the target corporation’s counsel because the parties included a provision in the merger agreement that explicitly precluded the buyer from using the communications in a post-closing dispute with the sellers. The court’s opinion serves as an important reminder to sell-side counsel to negotiate for these provisions to ensure that privileged pre-merger communications between the target’s counsel and the sellers cannot be used against them in any future disputes.
In September 2016, RSI Holdco, LLC acquired Radixx Solutions International, Inc., with Shareholder Representative Services LLC (the Representative) serving as the representative of the selling stockholders, pursuant to an Agreement and Plan of Merger. Following the closing of the merger, RSI acquired possession of Radixx’s emails, including pre-merger communications (the Emails) between Radixx and its counsel, which Radixx did not excise from the remainder of its emails. The merger agreement included the following provision, which, among other things, purported to preserve attorney-client privilege over pre-merger communications between Radixx and its counsel (the Retention Clause):
Any privilege attaching as a result of [counsel] representing [Radixx] . . . in connection with the transactions contemplated by this Agreement shall survive the [merger’s] Closing and shall remain in effect; provided, that such privilege from and after the Closing shall be assigned to and controlled by [Representative]. In furtherance of the foregoing, each of the parties hereto agrees to take the steps necessary to ensure that any privilege attaching as a result of [counsel] representing [Radixx] . . . in connection with the transactions contemplated by this Agreement shall survive the Closing, remain in effect and be assigned to and controlled by [Representative]. As to any privileged attorney client communications between [counsel] and [Radixx] . . . prior to the Closing Date (collectively, the “Privileged Communications”), [RSI], the Merger Subsidiary and [Radixx] (including, after the Closing, the Surviving Corporation), together with any of their respective Affiliates, successors or assigns, agree that no such party may use or rely on any of the Privileged Communications in any action or claim against or involving any of the parties hereto after the Closing.
Following the closing, RSI asserted fraud claims against the Representative and certain sellers and, in so doing, informed the Representative that it would use the Emails in the litigation. The Representative argued that RSI was precluded by the Retention Clause from using the Emails. RSI then filed a Motion for Disposition of Privilege Dispute with the Delaware Court of Chancery, seeking resolution of the dispute.
RSI argued that the Retention Clause was inapplicable because it only applied to privileged communications, and, according to RSI, the Emails were no longer privileged due to the sellers’ failure to segregate the Emails from the other emails that had been passed along to RSI post-closing. RSI also argued that clauses such as the Retention Clause cannot render privilege immune from subsequent waiver by sellers.
The court held that the sellers retained privilege over the Emails through the Retention Clause, relying chiefly on its earlier decision in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, where the court held that sellers may use their “contractual freedom” to carve out privilege from passing along to the acquiror in a merger. In its holding, the court rejected RSI’s arguments to the contrary.
As to RSI’s first argument, the court noted that the merger agreement defined “Privileged Communications” as those communications between counsel and Radixx before closing, and, because RSI did not challenge privilege as of the closing date, the language of the Retention Clause barred RSI from using the Emails in litigation. As to RSI’s second argument, the Court found that Radixx’s failure to claw back the Emails after closing was of no moment, reasoning that adopting RSI’s argument would run contrary to the court’s guidance in Great Hill and render the Retention Clause meaningless.
While Great Hill advised practitioners that a carve-out for attorney-client privilege included in a merger agreement for pre-merger communications would be an advisable option, RSI Holdco is the first confirmation of that guidance.
Consistent with the court’s opinion, sell-side counsel are well advised to negotiate provisions akin to the Retention Clause, or privileged communications may fall into the hands of acquirors to be used in post-closing litigation against the sellers.
A well-crafted provision will include the following elements: (i) pre-closing privilege will survive closing; (ii) the privilege will be assigned to the stockholder’s representative; (iii) the parties to the merger agreement will take necessary steps to ensure that the privilege will survive the closing and will be assigned to the stockholder’s representative; (iv) privileged communications are defined to include any privileged attorney-client communications between counsel and the target pre-closing; and (v) the buyer and its affiliates agree not to use the privileged communications in post-closing litigation against the sellers or the target.