Source: https://richardburtlaw.com/pre-acquisition-attorney-client-communications/
Timestamp: 2020-01-25 01:14:29
Document Index: 135186447

Matched Legal Cases: ['§ 259', '§ 259', '§ 259', '§ 259', '§ 259', '§ 259']

Pre-Acquisition Lawyer - Richard G. Burt
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The Delaware Court of Chancery has held that pre-merger communications — including those relating to the negotiation of the merger itself — pass to the surviving corporation in the merger, absent a contractual provision to the contrary. Thus, the buyer can learn what the former owners of the corporation and the corporate attorney discussed about the merger.
In Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155 (Del. Ch. 2013), the plaintiffs, buyers of a California corporation named Plimus, Inc., sued former shareholders and representatives of Plimus (referred to collectively in the opinion as the “seller”), alleging that the seller fraudulently induced the buyer to acquire Plimus, which was the surviving corporation in the merger.
After the buyer brought the suit, it notified the seller that it had discovered on Plimus’s computer systems certain communications between the seller and Plimus’s then-legal counsel regarding the transaction. During the year before the suit, the seller had done nothing to get these computer records back, and there was no evidence that the seller took any steps to segregate these communications before the merger or to excise them from the Plimus computer systems. The merger agreement lacked any provision excluding pre-merger attorney-client communications from the assets of Plimus that were transferred to the buyer as a matter of law in the merger. The merger agreement stated that the merger was intended to have the effects set forth in the Delaware General Corporation Law
When the seller was notified that the buyer had found pre-merger communications on Plimus’s computer system, the seller asserted the attorney-client privilege over those communications. The seller asserted that it, the seller, and not Plimus, retained control of the attorney-client privilege that belonged to Plimus for communications regarding the negotiation of the merger agreement.
The court disagreed and held that contract the privilege over all pre-merger communications — including those relating to the negotiation of the merger itself — passed to the surviving corporation in the merger, by plain operation of clear Delaware statutory law under § 259 of the DGCL.
Section 259 of the DGCL provides that following a 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 . . . .”
Nonetheless, the seller contended that the statutory term “all … privileges” did not include the attorney-client privilege, at least as to attorney-client communications regarding the merger negotiations.
The seller argued without citation that the legislature actually intended the “privilege” referred to in § 259 of the DGCL to include only certain property rights, and that it did not extend to privileges established by a rule of evidence. The court found that argument contradicted the plain statutory language.
The seller cited a New York case in support of its argument. In Tekni-Plex, Inc. v. Meyner & Landis, the New York Court of Appeals (the state’s highest court) split the privileges belonging to a Delaware corporation that was sold in a merger into two categories, and held that only one category passed to the surviving corporation in the merger, holding that the privilege over attorney-client communications regarding general business operations did pass to the surviving corporation in the merger. As to pre-merger attorney-client communications regarding the merger negotiations, the Court of Appeals concluded that the privilege did not pass to the surviving corporation without citing § 259 of the DGCL and instead gave policy reasons related to its analysis of New York attorney-client privilege law. The Court of Chancery refers to the New York court as innovating, which is a polite way of saying “They just made this stuff up.”
DGCL § 259 uses the broadest possible language to set a clear and unambiguous default rule: all privileges of the constituent corporations pass to the surviving corporation in a merger. The Seller conceded that the attorney-client privilege was transferred to Plimus for at least some purposes and that Plimus would be able to access and use these same documents if it was necessary to defend itself against a third party.
To accept the seller’s argument, “all . . . privileges” in § 259 of the DGCL would have to mean “all . . . privileges, minus judicially-created exceptions.” The court said that whatever the case may be in other states (not mentioning New York by name), members of the Delaware judiciary have no authority to invent an exception to the plain words “all . . . privileges” and usurp the legislature’s statutory authority.
The court went on to state that, “Of course, parties in commerce can — and have — negotiated special contractual agreements to protect themselves and prevent certain aspects of the privilege from transferring to the surviving corporation in the merger.” The parties here negotiated no such provisions.
Thus, the court held that, absent such an express carve-out, the privilege over all pre-merger communications — including those relating to the negotiation of the merger itself — passed to the surviving corporation in the merger, by plain operation of clear Delaware statutory law under § 259 of the DGCL.
1. The court noted in a footnote that it was not disputed that the California General Corporation Law “effectively follows” the Delaware General Corporation Law on the effect of a merger.
2. California Evidence Code 953 provides that “holder of the privilege” means:
So if the corporation that held the privilege was a disappearing corporation, the surviving corporation would likely hold the privilege.
3. California Evidence Code 911(b) states that except as otherwise provided by statute, no person has a privilege to refuse to disclose any matter or to refuse to produce any writing, object, or other thing. The California Supreme Court has interpreted this to mean that courts are not permitted to create non-statutory privileges as a matter of judicial policy. Is giving the former shareholders and officers of a corporation a right to assert a privilege that they did not have before an acquisition judicially creating a privilege?
4. While the parties are of course free to negotiate anything they like, whether a carve-out of the attorney-client privilege will be legally effective is unclear.
5. One solution is for lead counsel for the sellers not to represent the corporation in the transaction but to represent the corporation’s shareholders and representatives, with the corporation agreeing to reimburse those parties for their costs.
Contact Richard G. Burt today with questions pertaining to pre-acquisition agreements.
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