Retaining the Attorney-Client Privilege in a Merger

by BakerHostetler
Contact

In Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, Chancellor Strine of the Delaware Chancery Court recently reaffirmed that the target company in a Delaware merger is the sole holder of the attorney-client privilege to communications with its counsel and the privilege cannot be claimed by the seller (the target's shareholders). The Great Hill case involved a buyer who filed suit for fraudulent inducement by the seller following the consummation of the buyer's merger with a company owned by the seller because the buyer found troubling communications between the seller and counsel for the company about the merger on the company's computers. The seller argued that, as the pre-merger owner of the company, it owned the attorney-client privilege that protected communications between the company and counsel and that it also retained the attorney-client privilege after closing of the merger. Chancellor Strine disagreed with the seller. Upon the closing of the merger, the court expressly held that the attorney-client privilege rests with the surviving corporation owned by the buyer and the seller retains no rights or access to the target's privileged pre-closing communications.

In one of his last decisions before his confirmation as Chief Justice of the Supreme Court of Delaware, Chancellor Strine held, "the privilege over all pre-merger communications -- including those relating to the negotiation of the merger itself -- [passes] to the surviving corporation in the merger, by plain operation of clear Delaware statutory law under § 259 of the DGCL." Nonetheless, the parties to a merger can negotiate "special contractual agreements to protect themselves and prevent certain aspects of the privilege from transferring to the surviving corporation in the merger." However, since the buyer in a merger is unlikely to be willing to forgo acquisition of the target's attorney-client privilege, the seller and target in a merger should negotiate for the seller to retain rights to the target's attorney-client privilege for communications and attorney work product arising prior to the closing of a merger.

The Great Hill decision and § 259 of the DGCL can have far-reaching and unexpected consequences for parties to a merger. For a buyer, silence is golden, as the attorney-client privilege passes to the surviving corporation as a matter of law. For the same reason, a seller's silence as to the company's attorney-client privilege is problematic because the seller stands to lose all rights to the company's communications at closing. Accordingly, a seller may wish to protect its rights to the (pre-merger) company's privileged communications through joint privilege provisions in the terms of a merger agreement. Typical joint privilege provisions subject pre-closing privileged communications to a joint privilege to be held by the seller and the (pre-merger) company and give the seller and the (pre-merger) company equal rights to assert the joint privilege and its protections, unless the privilege is waived by the other party.

Alternatively, the seller and (pre-merger) company can negotiate a common interest agreement apart from the merger agreement, whereby the seller and company agree to joint rights to the company's privileged communications and prohibition of the use of the privileged communications against each other. A particular benefit of a common interest agreement between the seller and the (pre-merger) company is that consent by the buyer is not required.

In addition to protecting their rights to pre-closing privileged communications, it is also important for selling shareholders, target boards, and buyers to consult with their own counsel at the outset of merger negotiations to ensure that necessary precautions are taken to prevent the inadvertent waiver of the attorney-client privilege by including parties not covered by the privilege in privileged communications during merger negotiations.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© BakerHostetler | Attorney Advertising

Written by:

BakerHostetler
Contact
more
less

BakerHostetler on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!