Private Equity

In Great Hill Equity Partners IV, LP v. SIG Growth Equity I, LLLP,  80 A.3d 155 (Del. Ch. 2013), the Delaware Court of Chancery held that the privilege existing with respect to communications between the target’s counsel and its officers, directors and selling stockholders, in connection with the negotiation of a merger agreement, belongs to the acquiring/surviving corporation (not the selling stockholders), in the absence of a specific agreement among the parties to exclude those communications from the effect of the merger.  Great Hill specifically rejected a more liberal rule that would preserve the attorney-client privilege in favor of the selling stockholders with respect to communications between the target and its counsel regarding the merger itself (as opposed to other matters involving attorney-client privilege between the target’s counsel and the target) regardless of any contractual provision.  Addressing the concern that the more restrictive rule effectively eviscerated the attorney-client privilege where counsel was representing the target in a merger for the benefit of the selling stockholders, the court noted:

[T]he answer to any parties worried about facing this predicament in the future is to use their contractual freedom in the manner shown in prior deals to exclude from the transferred assets the attorney-client communications they wish to retain as their own.

Here, by contrast, the Seller did not carve out from the assets transferred to the surviving corporation any pre-merger attorney-client communications, and this court will not unilaterally read such a carve out into the parties’ contract.  Absent such an express carve out, the privilege over all pre-merger communications — including those relating to the negotiation of the merger itself — passed to the surviving corporation in the merger, by plain operation of clear Delaware statutory law under § 259 of the DGCL.

This issue is not limited to mergers.  The same issue can arise in a sale of stock where counsel is representing the target company being sold, as well as the selling stockholders, and is communicating with the management of that target company.  Following Great Hill, almost all merger and stock purchase agreements have contained specific provisions purporting to preserve in favor of the selling stockholders the privilege respecting pre-merger communications between the target and its counsel.  These provisions also typically address related issues such as the right of the target’s counsel to represent the selling stockholders in any subsequent dispute with the target relating to the merger notwithstanding their prior representation of the target.  An example of such a provision follows (emphasis added):

Legal Representation and Preservation of Privilege.  Parent and the Company (and the Surviving Corporation after the Effective Time) hereby agree, on their own behalf and on behalf of their directors, members, officers, employees and Affiliates, and each of their successors and assigns (all such parties, the “Waiving Parties”), that [name of Company’s law firm] (or any successor) may represent (a) any or all of the Sellers or any director, member, partner, officer, employee or Affiliate of the Sellers, or (b) the Seller Representative, in each case in connection with any dispute, litigation, claim, proceeding or obligation arising out of or relating to this Agreement, the Limited Guarantee, the Related Documents or the Transactions (any such representation, the “Post-Closing Representation”) adverse to the Waiving Parties or any other Person, notwithstanding its representation (or any continued representation) of the Company (and the Surviving Corporation after the Effective Time) and/or any of its Subsidiaries or other Waiving Parties, and each of Parent and the Company (and the Surviving Corporation after the Effective Time) on behalf of itself and the Waiving Parties hereby consents thereto and irrevocably waives (and will not assert) any conflict of interest, breach of duty, or any other objection arising therefrom or relating thereto.  Parent and the Company acknowledge that the foregoing provision applies whether or not [name of the Company’s law firm] provides legal services to the Surviving Corporation or any of its Subsidiaries after the Closing Date.  Each of Parent and the Company (and the Surviving Corporation after the Effective Time), for itself and the Waiving Parties, hereby further irrevocably acknowledges and agrees that all communications, written or oral, between the Company and Sellers and their counsel, including Weil, made in connection with the negotiation, preparation, execution, delivery and performance under, or any dispute or proceeding arising out of or relating to, this Agreement, the Limited Guarantee, any Related Documents or the Transactions, or any matter relating to any of the foregoing, are privileged communications that do not pass to the Surviving Corporation notwithstanding the merger, and instead survive, remain with and are controlled by the Seller Representative (the “Privileged Communications”), without any waiver thereof.The Parent and the Surviving Corporation, together with any of their respective affiliates, subsidiaries, successors or assigns, agree that no Person may use or rely on any of the Privileged Communications, whether located in the records or email server of the Company or the Surviving Corporation, or otherwise (included in the knowledge of their officers and employees, in any action against or involving any of the parties after the Closing; and the Parent and Surviving Corporation agree not to assert that the privileged has been waived as to the Privileged Communications that may be located in the records or email server (or in the knowledge of the officers and employees) of the Company or the Surviving Corporation.

One of the issues that troubled many deal counsel and their litigation colleagues, however, was whether you could really leave all of these emails on the target’s servers for the buyer to find, without effectively waiving the privilege you just preserved in your favor.  In other words, did you need to take the further step of purging the privileged emails or creating a separate server for pre-merger related communications to avoid those communications being available to be found by the buyer?  Well, almost six years after Great Hill, the Delaware Court of Chancery has now provided the answer.  No you don’t.  A properly worded provision is effective without further action. 

In Shareholder Representative Services, LLC v. RSI Holdco, LLC, C.A. No. 2018-0517-KSJM, memo. op. (Del. Ch. May 29, 2019), the Delaware Court of Chancery addressed an argument from the acquiring company that the selling stockholders had waived any claim of privilege over emails on the target’s servers notwithstanding a clause in the merger agreement that specifically preserved that privilege in favor of the selling stockholders’ representative.  The argument was that because the selling stockholders had failed to take action after closing to remove the privileged emails from the target’s servers, the privilege that was otherwise preserved in favor of the selling stockholders’ representative had been waived.  The court dismissed that argument for a number of reasons not the least of which was the specific language in the merger agreement whereby the buyer had specifically agreed not to use or rely upon any of the privileged communications in any post closing dispute (which was exactly what the buyer was trying to accomplish with its waiver argument).  But the court added that the waiver argument itself failed because the buyer had agreed to “take the steps necessary to ensure that any privilege attaching as a result of [the target’s law firm] representing [the Company] . . . in connection with the transactions contemplated by this Agreement shall survive the Closing, remain in effect and be assigned to and controlled by [the Stockholder’s Representative].”  Therefore, the buyer could not claim the benefit of any waiver to which the buyer may have contributed.

Whether that was a throw-away additional argument or not, it might be worth adding to the foregoing sample provision the following additional sentence (with alternative approaches in brackets): 

Each of Parent and the Company (and the Surviving Corporation after the Effective Time), for itself and the Waiving Parties, hereby further agree not to take any action that would result in any subsequent waiver of the privilege respecting the Privileged Communications.

While there may yet be unanswered questions regarding the carve-out of attorney-client privileged communications from being transferred to a buyer as a result of the sale of a portfolio company through a merger or sale of stock, at least one question appears to have been resolved: Your agreement can do most (if not all) of the work necessary to preserve that privilege in favor of the selling stockholder’s or their representative, at least in Delaware.