Last week, Vice Chancellor Kathaleen S. McCormick of the Delaware Court of Chancery issued a decision, Shareholder Representative Services LLC v. RSI Holdco, LLC,1 addressing when a selling company's attorney-client privilege relating to the sale of the company may be waived—such that the buyer can use otherwise privileged pre-merger communications in post-closing litigation against the selling parties. In particular, the Court concluded that the merger agreement at issue adequately preserved the sellers' privilege over communications with outside counsel related to the merger, even though all such communications actually transferred over to the buyer at closing. This topic is important for both sellers and buyers given the frequency, and potential seriousness, of post-closing deal claims.
Background
RSI Holdco builds on the 2013 ruling from then-Chancellor Leo Strine of the Delaware Court of Chancery in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP.2 In Great Hill, the Court ruled that in a merger of a Delaware corporation, its attorney-client privilege belongs to the surviving corporation under the Delaware merger statute, unless the merger agreement provides for a different result. There, because the merger agreement was silent on the issue, the buyer was able to use the sellers' otherwise privileged pre-merger communications in pursuing a post-closing fraud claim against various seller parties, with that litigation continuing on for several years.
Decision
In RSI Holdco, the Court interpreted language in a merger agreement that expressly addressed the attorney-client privilege—and whether that language prevented the buyer's attempts to use the sellers' otherwise privileged pre-merger communications in litigation between the parties relating to holdback amounts and purchase price adjustments. The provisions at issue specified that: 1) the sellers' privilege over pre-merger communications with counsel related to the merger "shall survive the Closing" and "remain in effect," 2) such privilege was "assigned to and controlled by" the stockholder representative, 3) the parties agreed "to take the steps necessary to ensure that any privilege… in connection with the transactions contemplated by this Agreement shall survive the Closing, remain in effect and be assigned to and controlled by" the stockholder representative, and 4) the parties and their affiliates were not permitted to "use or rely on any of the [pre-merger privileged communications] in any action or claim against or involving any of the parties hereto after the Closing." The buyer contended that the sellers had waived privilege over their pre-merger communications because they had not taken steps to "segregate" or "excise" the communications from computers and servers that transferred over to the buyer in the transaction and had not attempted to "get th[o]se computer records back."
The Court concluded that the merger agreement at issue adequately preserved the sellers' attorney-client privilege and prohibited the buyer from using the privileged material. The Court observed that the buyer's position was "contrary to the express language… of the Merger Agreement" and would undermine the premise from the Great Hill decision that parties to a merger agreement may "use their contractual freedom… to exclude from the transferred assets the attorney-client communications they wish to retain as their own." The Court emphasized that the merger agreement at issue expressly assigned privilege to the stockholder representative and contained provisions specifying that the buyer would not use the materials in any post-closing litigation involving the parties and would take steps to protect privilege.
Takeaways
The Great Hill decision stated important baseline rules governing the attorney-client privilege in the context of a merger. The new RSI Holdco decision provides important interpretive guidance on merger agreement provisions that address the attorney-client privilege given those rules—and underscores the importance of considering this issue, whether on the buy or sell side.
Daniyal Iqbal contributed to the preparation of this WSGR alert.
