Delaware Court Issues Important Decision About Privileged Communications' Ownership in Corporate Transactions

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Ever since the Delaware Chancery Court opinion in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155 (Del. Ch. 2013), wise lawyers representing sellers and buyers of corporations' stock or assets have negotiated the ownership of transaction-related privileged communications – just like any other asset. But sellers have wondered how to retain ownership or control of those communications if they do not or cannot delete them from the servers and computers transferred to buyers in such transactions.

In Shareholder Representative Services LLC v. RSI Holdco, LLC, the sellers negotiated a merger agreement provision: (1) recognizing continued privilege protection after the closing for their privileged transactional communications with their law firm Seyfarth Shaw; and (2) prohibiting the buyer from "us[ing] or rely[ing] on any of the Privileged Communications in any action or claim against or involving any of the parties hereto after the Closing." C.A. No. 2018-0517-KSJM, 2019 Del. Ch. LEXIS 196, at *4-5 (Del. Ch. May 29, 2019). The buyer nevertheless sought to use them in a post-closing dispute – arguing that "[b]ecause the sellers did not excise or segregate the privileged communications from the computers and email servers transferred to the surviving company," sellers waived their privilege and "the buyer may thus use the communications in this litigation." Id. at *3. The court rejected buyer's argument, finding that it would "undermine the guidance of Great Hill – which cautioned parties to negotiate for contractual protections." Id. at *10. The court held that the sellers could "assert that privilege in this litigation," and that buyer was "barred from using or relying on the Emails in this litigation." Id. at *11-12.

The Delaware decision should comfort selling companies who do not delete privileged communications from their servers and computers before transferring those to buyers, but who nevertheless want to prohibit those buyers from accessing or using the privileged communications.

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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