In Shareholder Representative Services LLC v. RSI Holdco, LLC et al, the Delaware Court of Chancery considered when a buyer can use the acquired company’s privileged pre-merger attorney-client communications in post-closing litigation against the sellers. The question arises because at closing all computer systems and email servers are acquired by buyers. Those systems and servers contain pre-merger communications between the target company’s owners and representatives (i.e., the sellers) and the target company’s counsel. Thus, in a post-closing dispute between the sellers and buyer, the buyer possesses the target company’s privileged pre-merger attorney-client communications, including those concerning merger negotiations.
The Court of Chancery previously addressed this issue in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP. The Court held that by operation of Section 259 of the Delaware General Corporation Law, all assets of a target company, including privileges over attorney-client communications, transfer to the surviving company unless the sellers take affirmative action to prevent transfer of those privileges. In Great Hill, the sellers did not retain their ability to assert privilege over the pre-merger attorney-client communications because they neither negotiated for language in the merger agreement preserving the right to assert privilege over the communications nor prevented the surviving company from taking actual possession of the communications. Thus, the Court held that the sellers waived their ability to assert privilege. The Court further advised that in the future sellers should “use their contractual freedom” to avoid waiver.
In the RSI Holdco case before the Court, the merger agreement, which involved the acquisition of Radixx, included the following provision:
“Any privilege attaching as a result of [Seyfarth] 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 [Seyfarth] 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 [Seyfarth] and [Radixx] . . . prior to the Closing Date (collectively, the “Privileged Communications”), [Holdco], 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.”
The Court noted, as reflected by the bracketed numbers that the provision (1) preserves any privilege attaching to pre-merger communications as a result of Seyfarth’s representation of Radixx in connection with the merger; (2) assigns to Representative control over those privileges; (3) requires the sellers and buyer to take steps necessary to ensure that the privileges remain in effect; and (4) prevents Holdco and affiliates from using or relying on any privileged communications in post-closing litigation against the sellers.
Buyer (Holdco) sought to use Emails discovered on servers in litigation against sellers and filed an action seeking “full, unfettered access” to the Emails. The Court held that by its plain and broad language, the merger agreement provision preserved privilege over the Emails and assigned control over the privilege to Representative. The Court also noted the provision does more than preserve the privilege. Its “no-use” clause provides that “none of the parties ‘may use or rely on any of the Privileged Communications in any action or claim against or involving any of the parties [to the Merger Agreement] after the Closing.’” Thus, the provision prevented Holdco from doing exactly what Holdco wanted to do—use the Emails in litigation with the sellers.
The Court rejected Holdco’s argument that the sellers waived privilege based on post-closing conduct because of the express language of the merger agreement provision spoke as of privileged communications prior to closing. Holdco also asserted a waiver occurred because sellers failed to take “steps to segregate” or “excise” the communications from the computer systems pre-merger and had “done nothing” post-closing to “get these computer records back.” This argument was rejected because it would undermine the guidance of Great Hill—which cautioned parties to negotiate for contractual protections.
Holdco’s arguments in support of waiver also suffer another problem. The merger agreement provision required all parties to the merger agreement to “take the steps necessary to ensure that any privilege attaching as a result of [Seyfarth] 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 the [Representative].” According to the Court, for privilege to be waived, it would necessarily be due in part to Holdco’s own failure to “take the steps necessary” to preserve it. As a result the Court stated Holdco cannot argue that its own failure to preserve privilege should now inure to its benefit.