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United States of America > New York > Litigation Dispute resolution > Article > Privilege...Privilege.... Who's Got The Privilege

Article: Privilege...Privilege.... Who's Got The Privilege

When a deal goes bad, one issue that inevitably arises is who retains the attorney-client privilege over pre-deal communications, the seller or the buyer/surviving corporation? Over fifteen years ago, the New York Court of Appeals held that while in most respects the attorney-client privilege passes to the buyer or surviving corporation, the privilege over attorney-client communications regarding the deal negotiations themselves does not pass to the surviving corporation. Recently, the Delaware Chancery Court disagreed and held that as a matter of law -- unless the parties agree otherwise -- the attorney-client privilege passes to the surviving corporation.

In Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLP, 80 A.3d 155, 156 (2013), plaintiff-buyer Great Hill Equity Partners IV, LP (“Buyer”), sued defendant-seller SIG Growth Equity Fund I, LLLP (“Seller”), alleging that Seller fraudulently induced Buyer to acquire a company called Plimus, Inc. (“Plimus”). After commencing the litigation, Buyer notified Seller that it had discovered on Plimus’ computer systems, communications between Seller and its counsel regarding the merger. Id. Seller asserted the attorney-client privilege over the communications, arguing that it and not the surviving corporation retained control of the privilege. Id. The merger agreement did not contain any provision excluding pre-merger attorney-client communications from the assets of Plimus that were transferred to Buyer in the merger. Id.

Seller’s argument relied on the decision of the New York Court of Appeals in Tekni-Plex, Inc. v. Meyner & Landis, 89 N.Y.2d 123 (1996), where the Court bifurcated the privileges that belong to a Delaware corporation sold in a merger. It held that the privilege over attorney-client communications regarding general business operations passes to the surviving corporation; however, the privilege over attorney-client communications specifically regarding the merger does not. Id. at 136-39. In its decision, the Court of Appeals did not cite Section 259 of the Delaware General Corporation Law (“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.” Great Hill, 80 A.3d at 156.

The Chancery Court was not persuaded by Seller’s argument or by New York’s decision in Tekni-Plex. Instead, the court held that the issue before the court was strictly one of statutory interpretation, namely, whether Section 259 includes the attorney-client privilege. Seller argued that the language “all . . . privileges” only includes certain property rights. Id. at 157. The court held that Seller’s argument was not “a plausible interpretation of the plain statutory language. That language uses the broadest possible terms to make sure that ‘all’ assets of any kind belong to the surviving corporation after a merger.” Id. Consistent with Delaware’s long-standing tradition of upholding the freedom of contract, especially between sophisticated parties, the court noted that notwithstanding its holding regarding the scope of Section 259, “parties in commerce can -- and have -- negotiated special contractual agreements to protect themselves and prevent certain aspects of privilege from transferring to the surviving corporation in the merger.” Id. at 160.

In conclusion, the court advised that parties worried about the implications of its holding should “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.” Id. at 161. In the transaction before the court, because the Seller failed to exclude pre-merger attorney-client communications from the assets being transferred to the surviving corporation, the court refused to unilaterally find such an exclusion in the contract. Id. at 162.

Last Update: 2014-Feb-23 Charles E. “Trip” Dorkey III - Dentons
The contents of this page do not constitute legal advice or create an attorney- client relationship with the contributor. Do not apply anything you read here without contacting a professional.
Author: Charles E. “Trip” Dorkey III
Law Firm: Dentons
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