In Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, Chancellor Strine of the Delaware Chancery Court recently reiterated that the target company in the Delaware merger is the sole holder of the attorney-client privilege of interacting with its lawyers and the privilege cannot be asserted by the seller (the target shareholders). The Great Hill case concerned a purchaser who filed a suit for fraud by the seller after the completion of the merger of the purchaser with a business owned by the seller because the purchaser noticed a disturbing contact between the seller and the company’s lawyers about the merger on the company’s computers. The seller claimed that, as the pre-merger owner of the company, it kept the privilege of the attorney-client that covered correspondence between the company and the lawyer and that it still maintained the privilege of the attorney-client after the merger had been closed. Chancellor Strine was not in agreement with the seller. Upon closing the merger, the court specifically held that the privilege of the attorney-client remains with the remaining company owned by the purchaser and that the seller does not hold any rights or access to the privileged pre-closing communications of the aim.
The Great Hill Decision and Section 259 of the DGCL can have far-reaching and unpredictable implications for the parties to the merger. For the customer, silence is golden, as the right of the attorney-client transfers as a matter of law to the remaining company. For the same reason, the silence of the seller as that of the company’s attorney-client privilege is troublesome because the seller would forfeit all access to the company’s correspondence at the close of business. Consequently, the seller may wish to protect its rights to the protected communications of the (pre-merger) business by means of a standard privilege clause in the sense of a merger agreement. Typical provisions on common privileges subject to the pre-closing of privileged communications on a shared privilege to be exercised by the seller and the (pre-merger) company and to grant equal rights to the seller and the (pre-merger) company to claim the common privilege and its protection, unless the privilege is waived by the other party.
Alternatively, the seller and the (pre-merger) company can negotiate a mutual interest arrangement other than a merger agreement, whereby the seller and the company agree to share the rights to the company’s privileged communications and to forbid the use of privileged communications with each other. The specific advantage of a mutual interest arrangement between the seller and the (pre-merger) business is that the consent of the purchaser is not necessary.
In addition to maintaining their rights to pre-closing protected correspondence, it is also essential for the selling of shareholders, target boards and buyers to consult their own counsel at the start of the merger negotiations to ensure that the required measures are taken to avoid the inadvertent waiver of the privilege of the attorney-client by involving parties not subject to privilege.