The Delaware Court of Chancery recently issued an opinion driving home the point, once again, that attention should be paid to contractually providing for the retention of the attorney-client privilege by the selling company in any merger transaction that is governed by Delaware law. Failure to do so can present a world of worry if post-merger litigation ensues, and the acquirer (often with access to privileged materials in transferred files and residing on network servers and hard drives) is deemed to have acquired the privilege formerly owned by the seller. Shareholder Rep. Services LLC v. RSI Holdco, LLC et al., C.A. No. 2018-0517-KSJM (Del. Ch. May 29, 2019).
Previously, the Court of Chancery held that the target (i.e., the acquired company) in a merger waived its claims of privilege with respect to pre-merger attorney-client communications (critically, with respect to the anticipated merger) unless it: (1) included a provision in the merger agreement preserving the right to assert its privilege or (2) prevented the company from taking actual possession of the communications. Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A. 3d 155 (Del. Ch. 2013).
The court in Great Hill relied on Delaware General Corporate Law Section 259, which provides that “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….” Id. at 157 (citing 8 Del. C. § 259(a) (emphasis added)). The court in Great Hill held that in the absence of a contractual provision or physical separation of the privileged communications, the acquirer obtains the selling party’s privilege claims following a merger. Id. This can give rise to great discomfort should litigation break out between the parties after the merger is consummated, and the target’s pre-merger attorney-client communications regarding the merger are fair game to the other side.
In Shareholder Rep. Services LLC, the target (wisely) heeded the teachings of Great Hill by including a contractual provision in the merger agreement that preserved the target’s privilege and that prevented the use of any privileged communications against the target in litigation following the merger. Shareholder Rep. Services LLC v. RSI Holdco, LLC et al., C.A. No. 2018-0517-KSJM at 2-3 (Del. Ch. May 29, 2019). The court held that this was a proper exercise of the parties’ freedom to contract and that the privilege provision was valid. Id. at 11-12. The court upheld the target’s claim of privilege. Id.
The Shareholder Rep. Services LLC decision highlights the importance of including sell-side, privilege-preservation provisions in merger agreements. Without them, a target’s ability to assert its pre-closing privilege likely will be deemed waived when the acquirer comes into possession of privileged documents and communications via the merger. Where such provisions are included, of course, it has ramifications for the acquirer: extreme caution must be exercised so as to avoid improper intrusions into the pre-closing privilege retained by the target.