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.
If you have any questions about this post, please contact Steven H. Goldberg at firstname.lastname@example.org or 212.589.4219; Ronald A. Stepanovic at email@example.com or 216.861.7397; or any member of BakerHostetler’s Mergers and Acquisitions team.