Have you gone through a merger or acquisition, or considered a merger and acquisition, and have been concerned about protecting pre-closing communications with your attorney? A recent case in Delaware has helped to clarify how sellers can protect privileged communications post-closing.
The Delaware Court of Chancery in Shareholder Representative Services LLC v. RSI Holdco, LLC, C.A. No. 2018-0517-KSJM (Del. Ch. May 29, 2019) recently upheld a provision in a private company merger agreement that protected privileged communications between the target company’s owners and representatives and the target company’s counsel and precluded the buyer from using these communications against the sellers in post-closing litigation. The RSI opinion follows the guidance from the decision in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A. 3d 155 (Del. Ch. 2013), which held that, absent an express carve out, the privilege over all pre-merger attorney-client communications, including those relating to the negotiation of the merger, transfer to the surviving company in the merger. RSI is the first decision since Great Hill to directly address the scope of a privilege claw-back provision in a private company merger agreement governed by Delaware law and re-emphasizes the importance to sellers of negotiating contractual protections in a merger or stock sale.
In RSI, the merger agreement contained a privilege claw-back provision that assigned all privileges over certain pre-closing communications to the sellers’ representative and prohibited the buyer from using or relying on any of the privileged communications in any post-closing litigation against the sellers. Upon closing of the merger, the buyer acquired possession of the acquired company’s computers and email servers, which contained numerous pre-merger emails between the sellers and the acquired company’s counsel. The buyer argued that the sellers had waived privilege because they did not segregate or excise the privileged emails from the computers and email servers pre-closing and did nothing post-closing to retain control over those emails.
The Court rejected the buyer’s waiver argument, holding that the merger agreement was sufficient to preserve privilege over the emails because it (i) specifically defined privileged communications as including any pre-closing attorney-client communications and preserved the privilege attaching to those communications; (ii) assigned control over the privilege to sellers’ representative; (iii) required all parties, including the buyer, to take necessary steps to ensure the privilege survived closing; and (iv) prevented the buyer from using or relying on the communications in any post-closing litigation against the sellers.
The RSI opinion highlights the importance of expressly and clearly addressing the treatment of pre-closing privileged communications that would otherwise transfer to the acquiror upon a sale or merger. Target companies are encouraged to ensure that their negotiated privilege claw-back provision includes all of the elements in the RSI provision. The RSI opinion makes it clear that a properly-drafted privilege claw-back provision eliminates the need for a seller to perform pre-closing document segregation in order to prevent buyer from accessing privileged communications.
Our team at Nemphos Braue has experience in all aspects of mergers, acquisitions, spin-offs, roll-ups, minority interest acquisitions and joint ventures. We provide sophisticated counsel to both strategic and financial buyers and sellers, regardless of the size. Our attorneys work hand-in-hand with our clients throughout the M&A process. Our M&A clients include local entrepreneurs and emerging businesses as well as leading national and international corporations, all with the goal of creating smooth transactions with the most beneficial outcomes. Contact us for more information – 410-321-8200.