Beware of What Happens to the Attorney-Client Privilege When Your Company is Sold

by Burns & Levinson LLP
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In Commodity Futures Trading Comm’n v. Weintraub, the United States Supreme Court noted that:

When control of a corporation passes to new management, the authority to assert and waive the corporation’s attorney-client privilege passes as well. New managers installed as a result of a takeover, merger, loss of confidence by shareholders, or simply normal succession, may waive the attorney-client privilege with respect to communications made by former officers and directors. Displaced managers may not assert the privilege over the wishes of current managers, even as to statements that the former might have made to counsel concerning matters within the scope of their corporate duties. [Emphasis added.]

While the foregoing may not seem too surprising to some, what if I told you that the new owners of a business can waive the privilege with respect to communications that the former owners had with company counsel solely to use those communications as evidence against the former owners in litigation? Well, that is exactly what the Delaware Court of Chancery recently allowed to happen in Great Hill Equity Partners v. Sig Growth Equity Fund, LLP.

In Great Hill, the plaintiffs acquired Plimus, Inc. through a merger agreement.  After that transaction was completed, the plaintiffs sued, claiming that the defendant sellers (the former shareholders and representatives of Plimus) had lied about Plimus’s business and otherwise fraudulently misled the plaintiffs into acquiring the company.  One year after the transaction was completed, plaintiffs discovered confidential emails about the merger between the defendants and their outside counsel that had not been purged from Plimus’s computers before the transaction was consummated.

The defendant sellers objected to the use of these emails, claiming that they were protected by the attorney-client privilege.  Because the merger agreement had a choice of law provision calling for Delaware law to apply, the Delaware Court of Chancery looked to a statute stating that, following a merger, “all property rights, privileges, … and every other interest shall be thereafter as effectually the property of the surviving or resulting corporation.”

The defendants argued that the term “privileges” in that statute was intended to mean “property rights” and could not have been intended to apply to something like the attorney-client privilege. While the defendants cited law from other jurisdictions tending to support their position, the Delaware Court of Chancery countered:

Whatever the case may be in other states, members of the Delaware judiciary have no authority to invent a judicially-created exception to the plain words “all … privileges” and usurp the [legislature’s] statutory authority.

Accordingly, the Court of Chancery held that the defendants had no ability to assert the attorney-client privilege because when the business was sold, the right to assert the privilege with respect to communications between the company and its counsel passed to the new owners as part of the sale.

Great Hill provides two key takeaways for in-house counsel:

  • First, it behooves in-house counsel to let their business clients know that if they are considering relinquishing control of the company, they likely will lose the right to keep communications with in-house or outside counsel confidential unless they contract to retain that right in the transaction documents.
  • Second, Great Hill is an excellent reminder that, as a prior post of mine is entitled, Choice of Law in a Contract Can Be Critical.

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