By: Joseph Martinez
In Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLP, the Delaware Court of Chancery held that the pre-merger attorney-client privilege of a corporation which is acquired in a merger transaction governed by Delaware law passes to the surviving corporation. Chancellor Strine’s opinion interpreted Section 259 of the Delaware General Corporation Law to be clear on the point that “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 ruling went on to state that without a contractual provision to the contrary, even the seller’s pre-merger attorney-client communications with respect to the merger itself would pass to the surviving corporation.
The Court stated in Great Hill that if a seller is interested in retaining control of pre-merger attorney-client communications or the attorney-client privilege itself, the parties can “use their contractual freedom in the manner shown in prior deals to exclude from the transferred assets the attorney-client communications they wish to retain as their own.” In addition to including contractual provisions in an agreement, sellers also should physically segregate the privileged communications which it wants to retain from those being transferred to the buyer.
Great Hill is only applicable to mergers governed by Delaware law. While many corporate statutes are similar to that of Delaware, care should be given to investigate what the potential outcomes might be in another state. In this Delaware ruling, the Court declined to follow a 1996 New York Court of Appeals case, Tekni-Plex, Inc. v. Meyner & Landis, which held that pre-merger attorney-client communications regarding merger negotiations are retained by the seller and do not pass to the surviving corporation.
Merger agreements have often included a waiver permitting seller’s counsel to continue representing the seller following a closing, including with respect to matters that may be adverse to the buyer or the company surviving the merger. Following Great Hill, Sellers would also be advised to address the question of what happens to pre-merger attorney-client communications and the attorney-client privilege.
For more information about Great Hill or questions about the attorney-client communications related to a merger, please contact Joe Martinez.