Type: Client Alerts
On November 15, 2013, in an opinion by Chancellor Strine, the Delaware Court of Chancery held that, under Delaware law, following a corporate merger, the attorney-client privilege passes to the surviving corporation unless the parties contractually agree otherwise.1
In Great Hills, plaintiffs (collectively, the “Buyer”) sued defendants (collectively, the “Seller”), arguing that Seller had fraudulently induced Buyer to purchase Plimus, Inc. (the “Surviving Corporation”). Following the merger, Buyer notified Seller that it had found on the Surviving Corporation’s computer systems correspondence regarding the merger transaction between Seller and the Surviving Corporation’s former legal counsel. Seller asserted that it (not the Surviving Corporation) retained the attorney-client privilege with respect to communications during merger negotiations.
The merger agreement negotiated by the parties did not carve out pre-merger attorney-client communications from assets of the acquired company. Moreover, the agreement specifically stated that the merger was to have the effects set forth in the Delaware General Corporation Law (the “DGCL”). Under section 259 of the DGCL, after a merger, “all property, rights, privileges, powers and franchises, and all and every other interest shall be thereafter as effectually the property of the surviving or resulting corporation . . . .”2
The Court of Chancery held that per the terms of section 259, in a merger, the attorney-client privilege passes to the surviving corporation as a matter of law. In so holding, the court relied on two basic principles to reject Seller’s claim that it retained the attorney-client privilege with respect to the communications in question. First, the Court of Chancery held that the plain meaning of “all … privileges” is that it includes all privileges, one of the most obvious of which is the attorney-client privilege.3 Second, citing the proper separation of powers and a desire to avoid usurpation of legislative authority, the court refused to claim authority to fashion a judicially created exception to the legislature’s chosen language.
The Court of Chancery noted that parties are free to negotiate contractual provisions regarding transfer of privileges in a merger, and stated as follows: “the answer to any parties worried about facing the predicament in the future is to use their contractual freedom . . . to exclude from the transferred assets the attorney-client communications they wish to retain as their own.”4 Such a provision might, for example, clearly state that any pre-merger attorney-client communications and the privilege attendant thereto regarding the merger transaction would be excluded from the assets to be transferred to the surviving corporation.
Parties negotiating a transaction to which Delaware law applies need to be mindful of who will own the attorney-client privilege after consummation of the merger. Parties may consider contractually modifying the effect of section 259. In this way, they can ensure that certain sensitive communications are protected and do not unwittingly become the property of the surviving, and potentially adverse, counterparty to a merger.
Sample Provision Excluding Attorney-Client Privilege from Assets Being Transferred
“Excluded Assets include: (i) any attorney-client privilege of Seller or associated with the business and operations of the Seller pertaining to the Merger and the ancillary transactions contemplated by the Merger Agreement; and (ii) all emails, correspondence, invoices, recordings, and other documents or files, evidencing or reflecting communications between the Seller and the Seller’s counsel pertaining to the Merger, and all files maintained by any law firm or legal counsel pertaining to the transactions contemplated by this Merger Agreement.”
- Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, Civil Action No. 7906-CS (Del. Ch. Nov. 15, 2013).
- Del. Code Ann. tit. 8, § 259 (emphasis added).
- The Seller argued that “privileges,” as used in section 259, really referred to “property rights.” The Court of Chancery disagreed, noting that the words “property” and “rights” were specifically enumerated in the statute. The court therefore refused to ignore the presumption that the legislature chose its words carefully, and instead chose to avoid an interpretation that would render certain statutory terms mere surplusage.
- Great Hill, Civil Action No. 7906-CS.
Client Alert 2013-312