DealLawyers.com Blog

The default rule in Delaware is that the attorney-client privilege passes in a merger from the acquired company to the buyer. However, the parties to a merger agreement may agree to depart from the default rule, and a recent Morris James blog highlights the Delaware Superior Court’s decision in Biomerieux v. Rhodes, (Del. Super.; 5/24), which held that the language of the parties’ merger agreement was sufficient to accomplish that objective.  This excerpt from the blog summarizes the Court’s ruling:

The default rule in Delaware is that the attorney-client privilege transfers from the target corporation to the surviving corporation in a merger. This rule was established by the Court of Chancery’s leading decision in Great Hill Equity Partners IV, LP v. SIG Growth Fund I, LLLP, where the Court found that, under Section 259 of the Delaware General Corporation Law, the attorney client privilege was a “privilege” whose ownership transferred to the surviving corporation, by Section 259’s express terms.

This decision from the Delaware Superior Court’s Complex Commercial Litigation Division demonstrates that parties can contract around the default rule by agreement. Here, the parties’ merger agreement provided that the attorney-client privilege “regarding” the merger agreement would remain with the sellers. Accordingly, the Court granted the seller-defendants’ motion to strike the buyer-plaintiffs’ use of an email containing the seller-defendants’ counsel’s legal advice “regarding” the merger agreement. The Court reasoned that, under the terms of the parties’ agreement, the attorney-client privilege remained with the seller-defendants and, thus, the buyer-plaintiffs were not entitled to use the privileged email.

In case you’re looking for some drafting guidance, here’s the relevant language from the merger agreement:

[E]xcept with the prior written consent of the Securityholders’ Representative, the attorney-client privilege regarding this Agreement and the Escrow Agreement and the transactions contemplated hereby and thereby shall not continue as the privilege of [the Target] but instead shall be the sole privilege of the Company Securityholders and the Securityholders’ Representative, and none of [the Buyer], [the Target], or any other person purporting to act on behalf of or through [the Buyer] or [the Target] will seek to obtain or access attorney-client privileged communications among [the Target] or any Company Securityholder and any representative of the Firm related to this Agreement, the Escrow Agreement, or the Merger or the transactions contemplated hereby or thereby.

Notice that the language references “the Firm,” which the agreement defines as the law firm representing the sellers in connection with the merger.  The Buyer sought to obtain an email communication to another law firm and argued that this language limited the communications as to which the privilege belonged to the selling stockholders to communications with the law firm that represented the sellers. The Court rejected that argument, concluding that it was clear from the language of the agreement that the privilege retained by the sellers was not limited to communications with that particular firm.

Keith Bishop reached out with this thought on today’s blog: “One important point that I would add is that there is no one “attorney-client” privilege.  If a case is brought in federal court or another jurisdiction (which often happens even when a Delaware corporation is the defendant), the federal court’s or the jurisdiction’s rules of evidence may be different than Delaware’s and even if the rules are the same, the court may interpret those rules differently.”  Keith has addressed attorney-client privilege issues in M&A transactions many times on his own blog.

– John Jenkins