Chancery Court Finds Merger Agreement Preserved Sellers’ Privilege Over Pre-Merger Attorney-Client Communications
Robert S. Reder & Jake Haskins | 73 Vand. L. Rev. En Banc 11 |
“Parties to a merger naturally retain individual legal counsel throughout the process. By operation of the merger statute, when the transaction closes all assets of each constituent corporation to the merger become assets of the surviving corporation. These days, surviving corporation assets generally include computers and servers replete with privileged communications between the target company and its attorneys. If post-closing litigation arises between the parties, the buyer’s possession of privileged pre-merger communications between the target company and its attorneys regarding the transaction can create a delicate situation. Addressing this tension in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155 (Del. Ch. 2013) (“Great Hill”), the Delaware Court of Chancery (the “Chancery Court”) held that those sensitive pre-merger attorney-client communications pass to the buyer at closing along with the target’s other assets. In so ruling, however, then-Chancellor Leo E. Strine Jr. advised future target corporations to use their freedom of contract to preserve the privilege post-closing.
The Chancery Court addressed this exact situation in Shareholder Representative Services LLC v. RSI Holdco, LLC, C.A. No. 2018-0517-KSJM, 2019 WL 2290916 (Del. Ch. May 29, 2019) (“Shareholder Services”). Unlike in Great Hill, the target company in Shareholder Services presciently preserved in the merger agreement the privilege over its pre-merger attorney communications in case of post-closing litigation. When litigation arose, the buyer contended it could use these communications, in the form of emails, notwithstanding the merger agreement, because the target company and the representative of the target’s owners allegedly waived privilege. Vice Chancellor Kathaleen St. J. McCormick, following Chancellor Strine’s reasoning in Great Hill, granted the representative’s request for a protective order.”