Selling your business?  Make sure you are not selling your attorney-client privileged communications.  A recent decision highlights the problem.  In Great Hill Equity Partners IV LP v. SIG Growth Equity Fund I LLLP, 80 A.3d 155 (Del. Ch. 2013), the buyer of a business sued the former owners of the company claiming that the owners had fraudulently induced the plaintiff into purchasing the business.  After the complaint was filed, the buyer realized that it had access to the seller’s pre-transaction communications with the company’s then-lawyers because they were stored on the company’s computers.  The seller claimed the documents were privileged and therefore needed to be returned to the seller.

The Delaware Chancery court ruled that based on the “plain operation of clear Delaware statutory law,” the seller’s pre-merger communications now belonged to the buyer.  The Chancery Court’s opinion relied on a Delaware corporate statute which provides that, post-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 ....”  The Court held that the broad language of the statute was intended to apply to all property and interests and even “all privileges, including the attorney-client privilege.”

The Court was well aware that its decision would prejudice sellers by disclosing pre-merger privileged communications to the buyer.  However, to prevent such disclosures, the Court explained that “the answer to any parties worried about facing this predicament in the future is to use their contractual freedom ... to exclude from the transferred assets the attorney-client communications they wish to retain as their own.”

New York leading court has a very different take on this issue.  In Tekni–Plex, Inc. v. Meyner & Landis, 89 N.Y.2d 123, 130, 136–38 (1996), the Court of Appeals squarely held that while the buyer is the holder of the company’s attorney-client privileged communications, that does not apply to attorney-client communications concerning the subject of the acquisition itself.  The Court reasoned that to grant [the acquiror] control over the attorney-client privilege as to communications concerning the merger transaction would thwart, rather than promote, the purposes underlying the privilege.  Therefore, the seller still controls the pre-merger attorney-client communications of the sold company.

Just because New York courts protect the seller’s privileged communications does not necessarily mean that New York businesses need not be concerned about the Delaware precedent.  Many transactions in New York involve the sale of companies that are incorporated in Delaware or contain contract provisions applying Delaware law.  Consequently, sellers of businesses should insist on a contractual provision that excludes privileged communications from being included among the assets passing to the acquiring company in the merger.

Believe it or not, many of the characteristics stereotypically associated with Sherlock Holmes were not actually significant elements in most—or even any—of the 60 stories written by Sir Arthur Conan Doyle about the now-iconic fictional detective.  Holmes’ magnifying glass, for example, appeared occasionally in the novels and short stories, while the distinctive, curved calabash pipe did not feature at all, but became a part of the Holmes persona over time, as people interpreted the character on stage, in films, and in illustrations.  The instantly-recognizable double-brimmed deerstalker hat, while not mentioned by name in the Sherlock Holmes canon, was represented in the original commissioned illustrations that accompanied the first publications of Conan Doyle’s stories in The Strand Magazine in the late 19th century.  Since then, there have been numerous adaptations and reinterpretations of the famous sleuth and his adventures with trusted sidekick, Dr. Watson.  Many of these adaptations, however, were produced only with the blessing of (and payment of licensing fees to) the late British author’s estate, even though only a handful of the stories from the Sherlock Holmes catalog of work were still under copyright. 

California-based lawyer and author Leslie Klinger—who, according to his website, is “one of the world's foremost authorities on Sherlock Holmes”—agreed to the Conan Doyle estate’s demand of purchasing a $5,000 copyright license before publishing his 2011 anthology entitled “Study in Sherlock: Stories Inspired by the Sherlock Holmes Canon.”  When the estate learned that Klinger was working on a sequel a few years later, they demanded his publisher halt publication until he would agree to obtain another license.  Instead of capitulating, Klinger sued the estate on the grounds that his work was only drawing from stories that were already in the public domain under copyright law, and thus, did not require a license for use.  Under US law, works published before 1923 are now considered to be in the public domain; this includes the 50 Sherlock Holmes stories published between 1887 and 1922.  But the 10 most recently-published stories are still under copyright protection, since they were published after 1923.  The Conan Doyle estate argued that the dynamic development of the two main characters was not fully complete until those final 10 stories were published, and hence, Holmes and Watson should not yet be freely used in the public domain, as elements of the characters themselves were still copyrighted.

A federal appeals court in Chicago disagreed with the Conan Doyle estate and the Conan Doyle estate has petitioned the Supreme Court to review this case.  If this court decision stands, the enigmatic residents of the fictitious 221B Baker Street will finally enter the public domain in their entirety and may be used freely in new creative works without having to seek permission from the author’s descendants.

Many commercial loan packages involve the signing of non-recourse, otherwise known as “bad boy,” guaranties.  Since the guarantor is often the principal of the borrower, the guarantor typically signs the “bad boy” guaranty assuming that the guarantors assets are not really at risk if the loan goes into default.  However, this assumption is far from the case because the “bad boy” events that trigger guarantor liability are usually not limited to fraudulent conduct, but other less pernicious conduct such as the borrower’s filing of bankruptcy, failure to pay taxes or maintain insurance.  Because the guarantor’s personal assets are potentially on the hook in these circumstances, it is critical that loan participants carefully negotiate the recourse provisions of the loan agreement.  Ambiguities often lead to contentious litigation . . . and more often than not, courts have sided with lenders.
 
Judge Deborah A. Batts of the Southern District of New York recently disrupted that cycle earlier this year when she decided that the defendant guarantor was not liable for payment of a loan balance after the property had gone into foreclosure.  See CP III Rincon Towers Inc. v. Cohen, 2014 WL 1357323 (S.D.N.Y. Apr. 7, 2014).  The Court held, inter alia, that various mechanic’s and judgment liens that encumbered the property were not “voluntary” and therefore did not trigger the guarantor’s full recourse liability under a “bad boy” provision that applied to “voluntary” liens.  By contrast, for a decision in which a lender successfully recovered against a guarantor on summary judgment, see Greenwich Capital Financial Products, Inc. v. Negrin, 74 A.D.3d 413 (1st Dep’t 2010), which was litigated by, among others, a member of our office while at his prior law firm.