In Delaware, Privilege Goes To The Buyer

Court Finds Buyer Controls Attorney-Client Privilege over Seller's Pre-Closing Communications Regarding Merger Negotiations, Unless Otherwise Agreed

The Delaware court of chancery held recently that control over a target company's attorney-client privileged communications, including communications between the target company's counsel and its pre-merger stockholders, passes to the acquiror upon the closing of the merger. Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP (Del. Ch. Nov. 15, 2013). As a result, the former stockholders of an acquired company were barred from asserting the attorney-client privilege over merger-related communications with the company's legal counsel that the buyer discovered on the company's computer systems after the closing of the merger.

The court noted, however, that the parties could have provided for a different result by contract through an appropriate provision in the merger agreement or other agreement.

BACKGROUND

A buyer acquired a company through a merger in which the target company survived. Over a year later the buyer sued the company's former stockholders for fraudulent inducement. The buyer also notified the former stockholders that it had found on the company's computer systems communications, regarding the merger, between the former stockholders and the legal counsel for the company in the merger.

The former stockholders attempted to prevent the buyer's use of the communications in litigation by asserting attorney-client privilege, claiming that they, and not the surviving company, retained control of the privilege over the company's communications regarding the negotiation of the merger agreement. The former stockholders cited cases1 in which courts had distinguished between communications regarding general business operations and communications relating to merger negotiations, with privilege over the former passing to the surviving company and privilege over the latter remaining in the control of the target company stockholders.

COURT FINDS PRIVILEGE CONTROLLED BY BUYER

Application of Delaware Merger Statute. The court cited the Delaware General Corporation Law, which provides that, following a merger, "all property, rights, privileges, powers and franchises ... shall be thereafter as effectually the property of the surviving ... corporation as they were of the several ... constituent corporations...."

2 The court found that the plain meaning of the statute was that the...