A foundation of the attorney-client relationship is the understanding that communications between the attorney and the client will be protected by the attorney-client privilege. However, for attorneys advising corporations in connection with mergers and acquisitions, there is growing uncertainty regarding how confidential communications between an attorney and the predecessor corporation will be treated after a completed merger.
In the context of the often intense and high-stakes negotiation of business deals, the corporate client (through its officers, directors, and employees) generally expects that statements made to its attorneys regarding the negotiations will be protected from future disclosure. There is a risk, however, that communications will lose their protection if, for example, there is subsequent litigation between the merging companies relating to the transaction.
Indeed, as evidenced by the case law discussed below, the assumption that communications occurring prior to a merger or acquisition will be protected is not always accurate. Being aware of this possibility—and determining whether the client should be warned of or prepared for this possibility—can help reduce potential exposure for both the client and the attorney.
Post-Merger Loss of Attorney-Client Privilege
In 2013, the Delaware Court of Chancery issued an opinion that has been the subject of much discussion for its possible implications on the preservation of the attorney-client privilege in the context of mergers and acquisitions, especially in light of the fact that many corporations are formed under Delaware law and many mergers are conducted in accordance with Delaware law.
The case, Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, C.A., involved a transaction in which the plaintiffs acquired the defendants and became the successor corporation. After the transaction closed, the successor corporation became unhappy with the merger and sued the corporation it acquired, alleging that the merger was the result of fraud during negotiations.
To help prove its case, the successor corporation sought disclosure of communications between the acquired corporation's officers and employees and their attorneys relating to the transaction. The dispute thus focused on whether premerger discussions between the acquired corporation and its attorneys remained privileged after the transaction.
The Delaware Court of Chancery agreed with the successor corporation, relying on a Delaware statute providing that "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." Because the attorney-client privilege was one of the rights and privileges that passed to the successor corporation, the successor corporation was entitled to all of the premerger communications between the acquired corporation and its attorneys. Thus, the successor corporation was deemed, essentially, to already "own" those communications and did not need to demonstrate special circumstances to pierce the privilege.
Seizing on the decision in Great Hill, a plaintiff/successor corporation in another recent case similarly argued before a Pennsylvania federal court that it was entitled to premerger communications between the predecessor entity and its attorneys. In NewSpring Mezzanine Capital II, L.P. v. Hayes, the U.S. District Court for the Eastern District of Pennsylvania likewise agreed with the successor corporation and found that the corporation's post-merger owners took control of the attorney-client privilege.
Notably, in addition to citing Great Hill, the court in NewSpring also relied heavily on the terms of the retention letter between the premerger corporation and its attorneys, as well as the terms of the transaction documents. The court concluded that, because the retention letter specified that the premerger corporation, and not any of the corporation officers, was the sole client of the attorney, none of the premerger corporation's officers retained control of the attorney-client privilege following the merger.
Although under somewhat different circumstances, a Georgia federal court has likewise suggested that, where a corporation acquires the majority of another corporation's assets, control of the attorney-client privilege will pass to the acquiring corporation. See Ramada Franchise Sys. v. Hotel of Gainesville Assocs. , 988 F. Supp. 1460, 1464 (N.D. Ga. 1997)
In addition, this issue can arise in bankruptcy context, as well as in cases involving the FDIC acting as successor to banks. Trustees and receivers are routinely vested with the rights of the corporation to waive the privilege or to obtain otherwise protected communications.
Tips for Limiting the Risks
For both corporate clients and attorneys, the unexpected loss of the attorney-client privilege can lead to severe consequences. To avoid uncertainty, many corporate attorneys working on mergers and acquisitions will consider the risks in three ways.
First, attorneys can consider addressing the issue in the engagement letter. To avoid surprises later, the engagement letter can warn the client of the risk that the successor entity might be entitled to discover the content of premerger communications. In addition, as suggested in NewSpring, the identity of the client as specified in the engagement letter can dictate whether the attorney-client privilege passes completely to the successor corporation.
Second, attorneys can attempt to address the issue in the nondisclosure documents associated with the transaction. For example, corporate clients and attorneys can request a provision specifying that all premerger communications shall remain privileged and that the limitation will survive the transaction, should it occur.
Finally, the issue can be addressed in the transaction documents themselves. The courts in both Great Hill and NewSpring considered the effect of the contractual language in the transaction documents on whether the attorney-client privilege passed to the successor corporation. Indeed, the court in Great Hill observed that "the answer to any parties worried about facing this predicament in the future is to use their contractual freedom … to exclude from the transferred assets the attorney-client communications they wish to retain as their own."
Thus, courts have signaled that the loss of the attorney-client privilege with respect to premerger communications in not inevitable in every transaction. By taking stock of the issue in advance, practitioners can help limit the risks for both the client and the attorney.
As published by The Daily Report