Delaware Court of Chancery Clarifies Contours of Attorney-Client Privilege

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In two recent opinions, the Delaware Court of Chancery clarified the parameters and application of certain aspects of the attorney-client privilege under Delaware law. On November 15, 2013, the court decided Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, Civil Action No. 7906-CS (Del. Ch. Nov. 15, 2013) and considered, in a matter of first impression, whether the attorney-client privilege passed from the target corporation to the surviving corporation in the context of a merger. The court found as a matter of law that the attorney-client privilege, as with all other privileges pursuant to Delaware General Corporation Law ("DGCL") § 259, passes to the surviving corporation, unless the parties contractually agree otherwise.

On December 9, 2013, the Court of Chancery decided MPEG LA, LLC v. Dell Global B.V., Civil Action No. 7016-VCP (Del. Ch. Dec. 9, 2013) and determined whether certain communications, which included a mix of business and legal advice, were protected by the attorney-client privilege. The court held that where business and legal advice are intertwined in a communication, the entire communication will be considered privileged only if the legal aspects predominate, or if the business and legal advice cannot be segregated.

Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP

In Great Hill, the plaintiff-buyer brought suit following its merger with the defendant-seller, alleging that the seller fraudulently induced the buyer to purchase it. Following the merger, the buyer discovered certain communications between the seller and its legal counsel regarding the transaction. The seller argued that the attorney-client privilege applied to the communications and that it, not the buyer, retained control of the privilege.

To determine whether or not the attorney-client privilege passed to the buyer, the court interpreted DGCL § 259, which provides that following a merger "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 . . . ." The seller contended that section 259’s "all … privileges" language did not include the attorney-client privilege. The court rejected the seller’s argument and concluded that the plain language of the statute uses the broadest language possible to ensure that "all" assets are transferred to the surviving corporation. The Court of Chancery concluded that the statute uses "the broadest possible language to set a clear and unambiguous default rule: all privileges of the constituent corporations pass to the surviving corporation in a merger." (emphasis included) Because the legislature addressed this issue with clarity, the court declined to usurp the legislature’s authority via a judicially created exception.

The court, however, reminded and encouraged parties to "use their contractual freedom" when negotiating merger agreements, which allows a target corporation to exclude from the transferred assets pre-merger attorney-client communications relating to the negotiation of the merger that it wishes to retain as its own.

MPEG LA, LLC v. Dell Global B.V.

In MPEG LA, the court considered whether three categories of documents withheld from production by Dell were protected by the attorney-client privilege: (1) emails sent to, received by or copied to Dell’s in-house legal director, who served in a mixed legal and business role in Dell’s dealings with MPEG; (2) emails sent among non-lawyer Dell employees that Dell contended reflected those employees’ intent to seek legal advice related to MPEG’s royalty audit of Dell; and (3) emails among non-attorney Dell employees providing or seeking information to facilitate legal advice on topics related to MPEG.

In its decision, the court first noted that under Rule 502(b) of the Delaware Rules of Evidence, a communication can qualify for the attorney-client privilege even if no party to the communication is an attorney. The court also clarified that the privilege protects legal advice only, not business or personal advice.

In deciding whether the documents were properly withheld by Dell, the court applied certain criteria as guidelines to determine whether documents containing both legal and business advice were in fact privileged. The court held that, in instances where business and legal advice are intertwined in a communication, the communication will be considered privileged only if the legal aspects predominate. For communications containing both business and legal advice, in which the business and legal advice can be easily segregated, the court concluded that the communications should be produced with the legal portions redacted. However, where legal and business advice cannot be segregated, or where it is too difficult to determine if the legal issues predominate in a communication, the court determined that the party asserting the privilege will be given "the benefit of the doubt," and the communication will not be ordered to be produced.

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Both Great Hill and MPEG LA provide valuable reminders that parties to transactions governed by Delaware law should take appropriate steps to ensure that the attorney-client privilege is not inadvertently compromised.

With regard to potentially privileged merger communications like that in Great Hill, if a target corporation wants to retain the attorney-client privilege over pre-merger communications pertaining to the merger, the target should attempt to negotiate a provision in the merger agreement that clearly excludes these communications from the pool of assets passing from the target corporation to the surviving corporation.

With respect to attorney-client communications that may involve legal and business aspects, a party should attempt, when possible, to discuss legal and non-legal matters in separate communications. Per the standard articulated in MPEG, whether a communication is privileged depends upon whether legal aspects "predominate," whether the business and legal advice are "inseparable" and whether the legal advice may be "easily" segregated. In order to avoid any subjectivity that may be associated with this standard, it behooves parties to draw clear lines between legal and non-legal communications wherever possible. To the extent that legal and non-legal matters cannot be discussed separately, a party should attempt to clearly label mixed communications that are subject to the attorney-client privilege to increase the likelihood that they will be protected from disclosure.