When there is a post-merger dispute between the representative of the selling stockholders and the buyer, the buyer might have access to privileged pre-merger attorney-client communications between the acquired company and its attorney, including communications about the merger itself. The Delaware Court of Chancery recently answered whether a buyer may use such communications in post-closing litigation against the representative of the selling stockholders. The court held the buyer could not use pre-merger attorney-client communications between the acquired company and its counsel because a provision in the merger agreement preserved the privilege for the representative of the selling stockholders and prohibited the buyer and its affiliates from relying on such communications in these circumstances. Shareholder Representative Services LLC v. RSI Holdco, LLC, C.A. No. 2018-0517-KSJM, 2019 WL 2290916 (Del. Ch. May 29, 2019). This decision underscores the need to consider attorney-client privilege issues in an acquisition.
The case involved a common situation in a merger. At closing, the target and its assets transferred to the buyer. The transfer of assets included computer systems and servers containing pre-merger communications between the target's principals and the target's attorney. The Delaware Code states that once a merger is effective, the "property, rights, privileges, powers and franchises" belong to the surviving or resulting entity. Del. Code Ann. tit. 8, § 259(a). In Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155 (Del. Ch. 2013), the court interpreted "privileges" to include evidentiary privileges over attorney-client communications and held that without "an express carve out," the privilege passed to the surviving corporation. The court reasoned parties must use their contractual freedom if they want to avoid this result. In Great Hill, the sellers had not negotiated for language in the merger agreement to preserve their privilege over pre-merger attorney-client communications, so they could not assert attorney-client privilege.
On the other hand, in the Shareholder Representative case, the sellers had negotiated language in the merger agreement, which preserved their ability to assert the privilege. The merger agreement included a provision that explicitly preserved for the representative of the selling stockholders any privileges that attached to pre-merger communications about the transaction and prevented the buyer from using privileged communications in post-closing litigation. The court found the language in the merger agreement sufficient to prevent the transfer of the privilege to the buyer under the Delaware Code even though the sellers did not remove or segregate the privileged communications from computers and servers transferred to the surviving company at closing.
Attorney-client privilege ownership should be considered carefully in any acquisition. To protect a seller's or seller's representative's right to assert attorney-client privilege, the acquisition agreement should address who will hold the privilege following the closing, whether the buyer and its affiliates will have access to attorney-client communications about the acquisition, and who can use the privileged communications and under what circumstances.
