This Richards Layton memo discusses the Chancery Court’s recent decision in Shareholder Representative Services v. RSI Holdco, (Del. Ch.; 5/19), in which Vice Chancellor McCormick upheld a provision in a merger agreement preserving the seller’s privilege for certain pre-closing communications.
The Chancery Court’s 2013 Great Hill Equity Partners decision made it clear that Delaware’s default rule is that all privileges, including the attorney-client privilege, pass to the acquirer following the closing of an acquisition. However, the Great Hill decision also said that parties may contract out of the default rule, and, to a greater or lesser extent, many have done that.
The parties in RSI Holdco included a privilege “claw back” in their merger agreement that prohibited the buyer from using or relying on privileged communications in any post-closing dispute. Despite that, the buyer sought to use 1,200 of the seller’s pre-closing emails in litigation against the seller. Those emails had not been segregated in any fashion prior to closing, and the buyer argued that any privilege had been waived. The Vice Chancellor rejected those contentions, and this excerpt from the memo summarizes part of her reasoning:
The Court stated that “[p]ermitting [the Buyer] to both ‘use and rely on’ the [e]mails would further render the express language of [the privilege claw-back provision] meaningless.” The Court further explained that the Buyer’s arguments in support of a waiver of the privilege failed because the merger agreement required the parties to “take the steps necessary to ensure that any privilege attaching as a result of [Radixx’s counsel] representing [Radixx] . . . in connection with the transactions contemplated by this Agreement shall survive the Closing, remain in effect and be assigned to and controlled by the [Representative].”
Thus, for the privilege to be waived, the Court found that it would necessarily be due in part to the Buyer’s own failure to “take the steps necessary” to preserve the privilege. The Court found that the Buyer could not argue that its own failure to preserve the privilege should now inure to its benefit.
The RSI Holdco decision is the first post-Great Hill case squarely addressing a contractual provision intended to preserve the seller’s attorney-client privilege, and the memo says that it provides sellers with some important takeaways when it comes to the key terms to include in such a provision:
Following the guidance in RSI, target companies and their counsel are encouraged to ensure that privilege claw-back provisions not only provide for the preservation of pre-closing privileged communications, but that they also (i) provide for the express assignment of control over the privilege to the stockholders’ representative, (ii) require all parties to take steps to ensure that the privileged communications are preserved and vested in the stockholders’ representative, (iii) prohibit the buyer from making use of any such privileged communications, and (iv) define the scope of materials subject to these protections as those privileged as of the closing date.
The memo also points out that if a seller includes a provision as comprehensive as this, it will provide the seller with another important benefit – the ability to avoid engaging in “a pre-closing document review and segregation exercise” in order to protect the privilege.
– John Jenkins