Let’s assume the transactional documents don’t address the privilege issues presented in the scenarios above. In which of these instances is the seller corporation’s claim of attorney-client privilege likely to be honored by a court in a subsequent dispute between the acquirer and the selling corporation?
- No. The privilege passes to the surviving corporation.
- Probably not a valid claim of privilege, though there is some supporting authority on general policy grounds.
- Good luck! The odds that the claim will be honored are none at all.
- Yep, the purchasing corporation will probably be able to get the privileged documents even in a suit between the two over the transaction.
- Nope. The privilege will apply; the purchasing/successor corporation will not be able to obtain privileged documents, unless the crime-fraud exception comes into play.
As a general guidance in these situations, consider the default rule: Prior managers who were parties to and created the privileged communications do not retain control over the privilege. According to the United States Supreme Court, the privilege belongs to new management.
“[W]hen control of a corporation passes to new management, the authority to assert or waive the corporation’s attorney-client privilege passes as well. New managers installed as a result of a takeover, merger, loss of confidence of shareholder, or simply normal succession, may waive the attorney-client privilege, with respect to communications made by former officers and directors. Displaced managers may not assert the privilege over the wishes of current managers. . . .”
Commodities Futures Trading Comm’n v. Weintraub, 471 U.S. 343, 349 (1985).
What the Supreme Court formulated as the default option at federal common law has been statutorily enacted by the Delaware legislature, which often sets the standard for corporation law in the United States. In Great Hill Equity Partners v. SIG Growth Equity Fund I, 80 A.3d 155 (Del. Ch. 2013), the claim was made that the seller had fraudulently induced the buyer into the transaction. Key attorney-client privileged documents were not excluded by agreement from the transaction. Indeed, such documents had been turned over on corporate computers without any prior review. Moreover, no claim of privilege or attempt to recoup privileged documents had been made for at least a year after the transaction. The court found no need to address the question of whether delay had waived the privilege. Nor did it reach the crime-fraud exception to the privilege. The Delaware Chancery Court relied on a state statute that, just as the Weintraub court had done, made the successor company the holder of the privilege.
However, there is precedent for the contrary proposition. In Tekni-Plex, Inc. v. Meyner & Landis, 674 N.E.2d 663, 670 (N.Y. 1996), the New York Court of Appeals distinguished between the general privilege that passed to the successor corporate management and a transaction-specific privilege that did not. If the transaction is at issue, the party that created the privilege remains its holder with the attendant right to assert or waive the privilege.
What can companies in these situations do to eliminate any uncertainty surrounding which entity can claim the privilege or to circumvent the default rule? Address the issue in the transactional documents, as the parties did in Postorivo v. AG Paintball Holdings, Inc., 2008 Del. Ch. LEXIS 17 (Feb. 7, 2008). In that case, the seller and the acquirer expressly carved out any privileged documents relating to the merger transaction itself. Despite Delaware’s statutory default position that the privilege was held by and could be asserted by the surviving or acquiring company, the court sustained the privilege asserted by the party that had created the privilege because there was a clause in the transaction documents that carved out the privilege as an asset that would not be transferred.
When the means to preserve the privilege are so readily at hand, companies should avail themselves of the obvious solution by including a clause addressing privilege issues in the transaction documents. In the absence of such care by the transactional attorneys, litigators will happily continue to assert and to fight over whether an attorney-client privilege should apply. The above-cited cases provide the road map for doing so.