Delaware Court of Chancery Holds Attorney-Client Privilege for Sellers' Pre-Merger Communications Transferred to Surviving Corporation in the Merger

In light of a recent Delaware decision, corporate sellers should be aware that, absent contractual provisions to the contrary, their attorney-client privilege might transfer along with all of their other rights and privileges in the business to the surviving corporation in a merger. 

The Delaware Court of Chancery in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, C.A. No. 7906-CS (Del. Ch. Nov. 15, 2013), recently held that in the absence of merger agreement provisions to the contrary, pre-merger attorney-client communications constitute assets of the target corporation that are transferred to the surviving corporation in a merger pursuant to Section 259 of the Delaware General Corporation Law.  

The action involved a claim by Great Hill Equity Partners IV, LP and other entities (collectively, the "Buyer") that the defendants (collectively, the "Seller"), who were former shareholders and representatives of Plimus, Inc. (Plimus), fraudulently induced the Buyer to acquire Plimus in a transaction structured as a merger. After being notified by the Buyer during the course of litigation that the Buyer had found Plimus computer files containing certain pre-merger communications between the Seller and its legal counsel, the Seller asserted attorney-client privilege over those communications on the ground that it retained control over the privilege.  

In considering Buyer's motion to resolve the privilege dispute, Chancellor Strine looked to the language of Section 259, which provides 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 . . ."  Chancellor Strine found that the only reasonable interpretation was that the reference to "all . . . privileges" includes the attorney-client privilege, which therefore was transferred to the surviving corporation in the merger. Rejecting the Seller's claims that this interpretation would create serious public policy issues and also rejecting application of contrary precedent which had not been decided under Section 259, Chancellor Strine noted that the statute was clear and there was therefore no policy gap to fill. He also stressed that selling parties were free to protect themselves through a contractual provision expressly exempting any attorney-client privilege from the assets being transferred. In that regard, he cited excerpts from three private company merger transactions, proffered by the Buyer, which contained provisions excluding pre-merger attorney-client communications from the assets to be transferred to the surviving corporation and explicitly acknowledging that the attorney-client privilege for those documents would belong solely to the seller after the merger.

The decision is an important prompt to sellers and counsel in private company mergers or other sell-side deals to consider the need to exclude privileged pre-merger communications from the assets conveyed at closing.