Buyer’s Purchase or Seller’s Privilege? Attorney-Client Communications in the Post-Sale Context

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Litigators are familiar with the attorney-client privilege as the focus of many discovery disputes, but transactional lawyers increasingly recognize the privilege as an asset that may or may not be part of the bargain in a corporate transaction.  The question of who “owns” the privilege may become the crux of litigation in the event the parties to a merger have post-transactional disputes.  As a recent case confirms, the answer in New York is quite different from the answer in Delaware, and New York’s answer may apply to a transaction regardless of contractual elections to the contrary.

In Delaware, in the absence of a contrary agreement, the attorney-client privilege is included among the assets the buying or surviving corporation acquires.  Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155 (Del. Ch. 2013).  Unless parties negotiate around the default rule, the surviving corporation retains the attorney-client privilege over any documents related to the transaction.  Shareholder Representative Servs. LLC v. RSI Holdco, No. CV 2018-0517-KSJM, 2019 WL 2290916 (Del. Ch. May 29, 2019).  In those circumstances, in Delaware, the surviving corporation can view all of an attorney’s prior communications with the sold or merged entity, and use those documents as evidence in post-closing disputes with sellers.  As a result of Great Hill and Shareholder Representative Services, we increasingly see purchase and sale agreements specify that the seller’s privilege is preserved after closing and does not transfer to the buyer.

New York law is to the contrary, as New York courts have made the policy decision to preserve the privilege by default.  In 1996, the New York Court of Appeals recognized that failure to respect the privilege might chill attorney-client communications during the merger process.  Corporate actors “should not have to worry that their privileged communications with counsel concerning the negotiations might be available to the buyer for use against the sold corporation.”  Tekni-Plex, Inc. v. Meyner & Landis, 89 N.Y.2d 123 (1996).  During a post-merger dispute, the surviving corporation could not “both pursue the rights of the buyer and simultaneously assume the attorney-client rights that the buyer's adversary retained regarding the transaction.” Tekni-Plex, 89 N.Y.2d at 138.  The Delaware Court of Chancery took note of this ruling in Great Hill, holding that it did not apply D.G.C.L. § 259 and had no bearing on disputes in Delaware. 

The New York Supreme Court, Appellate Division, recently encountered the conflict between New York and Delaware privilege law and reaffirmed the rule of Tekni-Plex in Askari v. McDermott, Will & Emery, LLP, No. 2016-04472, 2019 WL 6334192 (N.Y. App. Div. Nov. 27, 2019).  In that case, McDermott, Will & Emery had agreed to represent Kevin Askari and Sina Drug Corp., a New York corporation, in a reorganization, merger, and sale.  McDermott provided legal services as Sina was reorganized and merged with Oncomed Specialty, a limited liability corporation organized under the laws of Delaware.  The relevant agreements provided that the reorganization was to be governed by the laws of Delaware.

Subsequent to the reorganization, Askari asked McDermott for a copy of all its files concerning the restructuring transaction and transfer of ownership interests in Sina.  McDermott refused, stating that the transaction was governed by Delaware law, and therefore the attorney-client privilege over the files of the “seller” Sina now belonged to the “buyer” Specialty.  Specialty refused to disclose the files.  Askari sued, arguing that New York conflict of law principles provided that New York law governed the reorganization regardless of any choice of law clause in the agreements.  Therefore, Askari argued, the rule of Tekni-Plex should apply, and he was entitled to the files of the “seller” Sina.  The New York trial court held that Delaware law applied, the privilege belonged to Specialty, and McDermott was prohibited from releasing the files without Specialty’s consent.

The Appellate Division reversed.  The court found that New York’s connection to Sina Corp. and Askari gave it a substantial nexus to the case, and therefore New York law (and Tekni-Plex) applied regardless of any contractual agreement to the contrary.  Applying Delaware law giving “the new corporation, a putative defendant, sole access to and control of the merger-related documents by the exercise of the attorney-client privilege” would be “contrary to New York public policy as enunciated in Tekni-Plex.”  Askari v. McDermott, Will & Emery, LLP, 2019 WL 6334192.  The court declined to “enforce a [foreign] law which effectively forecloses New York corporations merging with foreign corporations from having the ability to pursue their claims against their counsel or the newly formed, post-merger entities based on the post-merger entities' control of the documents needed by the former entities to prosecute potential claims.”  Id.

Thus, Tekni-Plex remains good law in New York twenty-three years after it was decided.  Transactional attorneys should be mindful of New York’s attorney-client privilege doctrine as it applies in the merger context.  As Askari demonstrates, New York’s rule might still apply even where the parties have contractually elected to submit to Delaware law.

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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.

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