In what appears to be the first decision of its kind in Canada, the Alberta Court of Queen’s Bench has held that a corporate subsidiary’s rights to certain privileged communications will be transferred to a purchasing entity unless precautions are taken. Specifically, the Court found that a subsidiary’s rights in respect of privileged communications relating to a share purchase transaction will be transferred to the purchasing entity when: (1) under the share purchase agreement, the purchasing entity buys the shares of the subsidiary from the selling entity (2) the share purchase agreement does not reserve to the selling entity ownership of the privileged communications, and (3) the subsidiary is subsequently amalgamated with the purchasing entity.
In NEP Canada ULC v MEC OP LLC, 2013 ABQB 540, the Court considered a dispute between a seller (NEP) and a purchaser over solicitor-client privilege ownership in litigation arising from the acquisition of the seller's subsidiary. In that case, NEP’s claim of solicitor-client/attorney-client privilege over the legal advice received by its subsidiary relating to the negotiation and execution of the Share Purchase Agreement (“SPA”) was rejected on two principal grounds.
- The Court found that NEP and its subsidiary had sought and received legal advice from the same in-house and external counsel, and had shared information between and among themselves in connection with the negotiation and execution of the SPA. As a result, NEP’s subsidiary had rights in respect of the privileged communications on the basis of a joint or common interest privilege with NEP. At least in connection with the negotiation and execution of the SPA, the subsidiary was in a solicitor-client relationship with both counsel.
- As a result of the amalgamation between the amalgamating entity and NEP’s subsidiary, the subsidiary's pre-closing, pre-amalgamation rights, including its rights in respect of privileged communications, remained fully intact and those rights had passed to the amalgamated entity.
The Alberta Court considered a number of U.S. decisions in reaching this conclusion, including the Delaware Chancery Court decision in GreatHill Equity Partners IV, LP v SIG Growth Equity Fund I, LLP (Del. Ch. Nov. 15, 2013). In Great Hill, the Delaware Court concluded that, by operation of the Delaware Corporation Law, the absence of a contractual provision specifically excluding solicitor-client communications relating to a merger/amalgamation transaction from the assets transferred as part of the sale meant that ownership of those privileged communications passed to the purchaser.
The lesson: Treat privileged communications like any other asset
In NEP, the Court suggests that this unfortunate (at least from NEP’s perspective) situation could easily have been avoided through the insertion into the SPA of a clause “under which any rights [NEP’s subsidiary] had to exercise or waive privilege over documents relating to the SPA negotiations would terminate on closing, leaving NEP in sole possession of the privilege.”
Sellers like NEP 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.