Maintaining Attorney‐Client Privilege in a Merger in the Wake of Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP
On November 15, 2013, the Delaware Court of Chancery held that the surviving corporation in a merger owns and controls the seller’s attorney‐client privilege, including pre‐merger attorney‐client communications regarding the negotiation of the merger, absent an express carve‐out in the merger agreement.1
The plaintiffs (the Buyers) in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP (Great Hill) acquired Plimus, Inc., a California corporation (Plimus), in September 2011 through a merger in which Plimus was the surviving corporation. A year later the Buyers brought suit in the Delaware Court of Chancery against the former stockholders and representatives of Plimus (the Sellers), alleging that the Buyers were fraudulently induced to acquire Plimus.
After bringing the suit, the Buyers notified the Sellers that among the files on Plimus’ computer systems that the Buyers had obtained in the merger were communications between the Sellers and Plimus’ former legal counsel regarding the merger. The Sellers “asserted the attorney‐client privilege over those communications on the ground that [they], and not the surviving corporation, retained control of the attorney‐client privilege that belonged to Plimus for communications regarding the negotiation of the merger agreement.”2 Specifically, the Sellers argued that “all privileges” as used in Section 259 of the General Corporation Law of the State of Delaware (the DGCL) did not encompass the attorney‐client privilege, which privilege was maintained by the Sellers.3
In response, the Buyers argued that Section 259 of the DGCL – which provides that upon 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” – controlled and caused Plimus’ attorney‐client privilege to pass to the surviving corporation.4 Applying well established rules of statutory construction, the Court agreed. According to the Court, Section 259 of the DGCL “uses the broadest possible terms to make sure that ‘all’ assets of any kind belong to the surviving corporation after a merger,”5 such that “all means all” and includes the attorney‐client privilege.
Express Contractual Carve‐Out
The Court indicated that sellers wishing to avoid transferring the attorney‐client privilege along with all of their other assets in a merger “can – and have – negotiated special contractual agreements to protect themselves....”6 According to the Court, “the 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.”7 “Absent such an express carve out, [however], the privilege over all pre‐merger communications – including those relating to the negotiation of the merger itself – passe[s] to the surviving corporation in the merger, by plain operation of clear Delaware statutory law under § 259 of the DGCL.”8
Waiver of the Attorney‐Client Privilege
An express provision of the merger agreement carving out the seller’s attorney‐client privilege from the assets of the seller transferred in the merger is an important first step in retaining the seller’s attorney‐ client privilege. Including a carve‐out in the merger agreement, however, may not be enough to preserve the attorney‐client privilege. Having decided that the attorney‐client privilege transferred to the surviving corporation in the merger, the Court in Great Hill did not reach the question of whether the Sellers waived the attorney‐client privilege by failing to remove the privileged communications from Plimus’ computer systems prior to the merger. The Court hinted, however, that the Sellers may encounter difficulty in arguing that they had not waived the privilege, “through [their] lengthy [(a full year after the merger)] failure to take any reasonable steps to ensure the Buyer did not have access to the allegedly privileged communications.”9
As a practical matter, preserving the attorney‐client privilege can be difficult in the context of a merger. E‐mail communications often intensify in the days leading up to both the execution of the merger agreement and the closing of the merger. As deadlines approach and last‐minute issues arise, hasty e‐ mails are too often typed on cell phones and PDA’s and dispersed to a wide “working group.” Great Hill stands as an important reminder of the discipline and care required, not just in drafting the relevant provisions of the merger agreement, but in protecting the seller’s attorney‐client privilege throughout the merger process.
There are several steps that parties can take to help avoid waiving the attorney‐client privilege. For example, counsel should consider who the client is – the company or certain principal stockholders – and therefore to whom the attorney‐client privilege belongs, and make sure that an engagement letter is entered into with the correct party or parties and that communications counsel intends to be given the protection of the attorney‐client privilege are made only with the “client.”10 Principal stockholders who have their own counsel and who also serve as directors, officers or employees of the seller, should consider setting up personal e‐mail accounts to communicate with their counsel on the merger or sale negotiations rather than using company e‐mail accounts.11
Stop ‐ Think ‐ Send
There are usually dozens of issues to consider during the course of a merger or other sale process. Nevertheless, parties to a merger or other sale process should remain aware of the risks to the attorney‐ client privilege, including negotiating the relevant provisions in the agreement and segregating and/or removing the privileged e‐mails and files from the seller’s computer systems. Before clicking “send” (or potentially even worse “send all”) the seller and its counsel are well advised to take a moment to stop and re‐read each e‐mail and check its recipients for possible attorney‐client privilege issues.
1 Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, __ A.2d __, 2013 WL 6037329 (Del. Ch. Nov. 15, 2013).
2 Id. at *1.
3 Id. at *1.
4 The merger agreement in Great Hill stated that “[t]he Merger shall have the effects set forth in this Agreement and in the applicable provisions of the DGCL and the [California General Corporation Law (‘CGCL’)).” Id. at *1 n. 1. Although Plimus was a California corporation and the buyer was a Delaware corporation, the merger agreement stated that “[a]ll disputes, controversies, issues and questions concerning the construction, validity, interpretation and enforceability of this Agreement ... shall be governed by and construed in accordance with the Laws of the State of Delaware ....” Id. The Buyer represented to the Court that the CGCL “effectively follows” the DGCL, and the Sellers failed to argue otherwise. Id.
5 Id. at *1.
6 Id. at *3. In this regard, the Court cited to Postorivo v. AG Paintball Holdings, Inc., 2008 WL 343856 (Del. Ch. Feb. 7, 2008), in which a New York law governed asset purchase agreement expressly excluded from the assets transferred to the buyer, “all rights of the Seller under th[e] [Asset Purchase] Agreement and all other documentation relating to the transactions contemplated [t]hereby.” Great Hill, at *3 n. 27.
7 Id. at *4.
9 Id. at *4.
10 Ryan v. Gifford, 2007 WL 4259557 (Del. Ch. Nov. 30, 2007) (finding that the special committee’s attorney‐client privilege was waived by the presentment of its report to the full board of directors, which included individual directors accused of wrong‐ doing and their counsel); see also Ryan v. Gifford, 2008 WL 43699, *5 (Del. Ch. Jan. 2, 2008) (refusing an interlocutory appeal on the November 30, 2007 decision of the Court).
11 See In re Information Management Services, Inc., 2013 WL 4772670 (Del. Ch. Sept. 5, 2013) (finding that senior executives waived the attorney‐client privilege with respect to communications with their personal attorneys made through their work emails).