Preserving Privileged Communications After a Merger

In a merger, unlike an asset purchase, all assets and liabilities are transferred, or assigned, to the buyer or successor company by operation of law. These assets include files and data, including legal files and correspondence. For companies in merger negotiations, there are often sensitive discussions and assessments made by the target company and its counsel concerning issues such as the merger negotiations and potential or actual liabilities, which can impact the purchase price or even the jeopardize the closing. In addition, there can be post-merger claims by the acquiring entity, often against assets of shareholder groups, or holdbacks of the purchase price. In Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155 (Del. Ch. 2013), the Delaware Chancery Court held that pre-merger attorney-client privileged communications between target stockholders and the target’s outside counsel regarding a merger were owned and controlled by the buyer after merger closed, and could be used by the buyer in litigation concerning alleged breaches of the seller’s representations and warranties. The Court also noted that the parties to the merger agreement could negotiate a provision in the merger agreement to preserve the attorney-client privilege. Recently, in Shareholder Representative Services LLC v. RSI Holdco, LLC, C.A. No. 2018-0517-KSJM (Del. Ch. May 29, 2019), the Delaware Court of Chancery had an opportunity to address such a provision and upheld a clause in a private-company merger agreement preventing the acquiror from using the target’s privileged emails in post-merger litigation. In that case, the merger agreement contained a Great Hill provision that assigned pre-merger privileged communications to the stockholders’ representative and prevented the buyer from using such communications. Despite this, the buyer attempted to use over 1,200 pre-merger emails that it obtained from the email servers of the target company, which were acquired by operation of law in the merger. In ruling on the privilege dispute, the Court held that the parties were legally able to exclude from the transferred assets the privileged communications and that the negotiated clause preserved the privilege and prohibited the Buyer from using the communications in post-merger litigation. The Court reached this ruling even though the target shareholders representative had not taken steps to prevent the disclosure of the emails. The RSI case is the first opinion of the Delaware Court of Chancery to directly address the scope of a privilege assignment or “claw-back” provision in a merger agreement. As highlighted by the Court, it is critically important to negotiate and draft these provisions with detail and precision. These provisions can become very important if there are post-merger disputes, as they can affect the consideration retained by the sellers. When drafting these provisions, target companies and their stockholders want to ensure that they preserve pre-closing privileged communications, clearly assign control over the privilege to the target stockholders or their representative, and prevent the acquiror from using the privileged communications in subsequent litigation or claims. A carefully drafted provision can also save the seller’s stockholders from undertaking a comprehensive pre-closing document review and separation of communications.