Protect Your Firm's Premerger Communications
As merger and acquisition activity slowly starts to increase, attorneys representing corporate entities in such transactions face increased risk arising from the possibility that highly confidential communications between a corporate entity and its counsel might not be protected in subsequent litigation between the merging companies. It is this foreseeable risk that, if undisclosed, can create exposure for both the client and the attorney.
Typically, clients and attorneys expect that the attorney-client privilege protects communications between attorneys and a corporate entity (through its officers, directors and employees). Certainly, clients involved in heavily (and sometimes hotly) negotiated deals expect that the privilege protects their thoughts, purposes, intents, and statements communicated to their attorneys from future disclosure.
However, that may not be true in some circumstances. The implications for the clients, and correspondingly for attorneys who failed to inform their clients of those implications, can be serious. A recent case decided in Delaware, the preferred jurisdiction for many corporate entities, illustrates the challenge.
In Great Hill Equity Partners IV v. SIG Growth Equity Fund I, arising out of a dispute between parties to a merger transaction, the Delaware Court of Chancery considered which party owned the privilege attaching to attorney-client communications that occurred before the merger. In that case, the plaintiffs acquired the defendants and were the surviving corporation.
After the merger, the successor corporation was unhappy with the transaction and sued the corporation it acquired, alleging the merger was a result of the defendant's fraud during negotiations. The plaintiff successor corporation sought the communications between the acquired corporate officers and employees and their attorneys in connection with the transaction.
In the end, the dispute focused on whether premerger discussions between the defendant acquired corporation and its attorneys remained privileged after the transaction.
Significantly, this is not a new risk for corporate attorneys. In fact, the issue has become quite common in the bankruptcy context, as well as in cases involving the FDIC acting as successor to banks. Routinely, successors-in-interest by operation of law, such as trustees and receivers, have been vested with the rights of the corporation to waive the privilege or learn the content of otherwise protected communications. Because the successor-in-interest literally steps in the shoes of the corporation, it is a surprise for courts to conclude that the corporation, through a trustee or receiver, could waive the privilege or discover the content of the communications.
What makes the Great Hill Equity Partners case different, however, is that the acquiring successor corporation was an adversary in the merger transaction. Having been on opposite sides of the deal, each with its own counsel advising it, the respective clients almost certainly had an expectation that their strategies, goals and purposes would be protected by the attorney-client privilege subject only to the known exceptions. Notably, those exceptions, such as the fraud exception, were not dispositive; rather the case turned on who owned the right to privileged information after the merger.
In Great Hill Equity Partners, the defendant acquired corporation argued that its premerger privilege survived the merger and remained in tact. The plaintiff successor corporation argued that the attorney-client privilege was simply an asset that had been purchased from the defendants.
The Delaware Chancery Court agreed with the plaintiff, relying on a statute providing 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 as they were of the several and respective constituent corporations." As a result, the successor corporation had the right to the content of all of the premerger communications between the acquired corporation and its attorneys.