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In a case of first impression, the Delaware Court of Chancery recently ruled that under Delaware law the attorney-client privilege does not survive upon a sale of the company in the absence of any provision in the merger agreement excluding pre-merger attorney-client communications from the assets transferred from the Seller to the Buyer.


In Great Hill Equity Partners IV, L.P v. SIG Growth Equity Fund I, LLLP (click here), the Buyer - a full year after the merger - brought suit charging that the defendants, former shareholders and representatives of the Seller, fraudulently induced the Buyer to acquire the Seller's company.  The Buyer then notified the Seller that, among the files on the computer system that the Buyer had acquired in the merger were communications between the Seller and its then-counsel, Perkins Coie.  During that year, 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 excise them from the company computer systems, the control over which was passed to the Buyer in the merger.  It was also undisputed that there was no provision in the merger agreement excluding pre-merger attorney communications from the sale of the assets that were transferred to the Buyer as a matter of law in the merger, or that the merger was intended to have the effects set forth in the Delaware General Corporation law.  Nonetheless, when the Seller was notified that the Buyer had found pre-merger attorney-client communications on the computer system, the Seller asserted the attorney-client privilege over those communications on the ground that it retained control over communications relating to the negotiation of the merger.  The Buyer brought a motion seeking to resolve this privilege dispute and determine,among other things, that the surviving corporation owns and controls any pre-merger privilege of the Seller or, alternatively, that the Seller has waived any privilege otherwise attaching to those pre-merger communications.


The issue before the Court, therefore, was one of statutory interpretation of Section 259 of the DGCL, which 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."  Applying a "plain meaning" statutory interpretation, the Court rejected the Seller's argument that attorney client communications were excluded from the statute, ruling that the term "all privileges" necessarily includes the attorney-client privilege.  "If the General Assembly had intended to exclude the attorney-client privilege, it could easily have said so.  Instead, the statute 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 Court also rejected the Seller's argument that construing the statute in this matter would implicate serious public policy issues.  Instead, the Court observed that "when the General Assembly has addressed an issue within its authority with clarity, there is no policy gap for the court to fill.  If a valid statute is not ambiguous, the court will apply the plain meaning of the statutory language to the facts before it."  The Court, in an apparent attempt to alleviate the effect of its ruling in the future, recognized that "[o]f 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 take-away here if you are a Seller and want to ensure your  attorney-client privileged communications remain  privileged after the sale of the company?  Make sure that you insert a provision in the agreement carving out from the assets transferred to the surviving corporation any pre-merger attorney-client communications, so that particular elements of the privilege do not pass to the surviving corporation as an incident of the sale.