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.
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.