A recent decision of the Delaware Court of Chancery highlights the need to address explicitly by contract which party or parties will control attorney-client privilege with respect to pre-closing communications in the context of a sale structured as a merger where legal counsel jointly represents both the seller(s) and the target acquired in the merger.
In Great Hill Equity Partners v SIG Growth Equity Fund(1), a single law firm represented both the sellers and the target in connection with the sale of Plimus, Inc to a buyer group led by Great Hill Equity Partners. The deal was structured as a reverse triangular merger in which the target, Plimus, was the surviving corporation. Post-closing, the buyer filed suit in Delaware alleging fraudulent inducement by the selling shareholder group. During that lawsuit, a year after the merger closed, the buyer notified the seller that the Plimus computer system (which the buyer acquired in the merger) contained files with communications between the sellers and their legal counsel regarding the transaction. The merger agreement did not exclude attorney-client communications from the assets to be acquired; nor did it specify who would control privilege with respect to such communications. When notified that the buyer had found these communications, the sellers asserted attorney-client privilege. The buyer disputed that assertion and argued that the sellers had waived any privilege that might otherwise apply.
The court ruled in in favour of the buyer, affirming that under the Delaware merger statute (DGCL Section 259), unless otherwise agreed, the surviving corporation in a merger succeeds to all rights and privileges (including attorney-client privileges) of the constituent corporations. The Delaware Chancery Court declined to adopt the approach of an earlier New York decision involving the merger of a Delaware corporation that had relied on policy-based considerations to distinguish attorney-client communications related to general business operations of the target (which the New York court held did pass to the surviving corporation) from communications related to the sale transaction (which the New York court held did not pass to the surviving corporation). The court relied on the clear language of Section 259 to hold that "all privileges" pass to the surviving corporation absent specific agreement of the parties. The decision noted that parties are free to contract around that default rule by, for example, providing for the seller to retain the attorney-client privilege with respect to pre-merger attorney-client communications relating to the transaction.
The Great Hill decision demonstrates the importance of addressing issues of attorney-client privilege, confidentiality obligations and waiver of conflicts in connection with the sale of a company, particularly in circumstances where a law firm represents both the sellers and the company with respect to pre-closing communications relating to the deal. It also suggests that sellers may want to consider taking steps to avoid turning over privileged material to the buyer – for example, by taking action to scrub sensitive attorney-client communications that relate to the sale transaction from the target's computer systems before closing, or at least including in the agreement specific language to address the ownership of such material in situations where the parties wish to contract around default rules.
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