It may be that enough has been written about the holdings in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155 (Del. Ch. 2103) (herein, “Great Hill”) and Tekni-Plex, Inc. v. Meyner & Landis, 89 N.Y.2d 123 (N.Y. 1996) (“Tekni-Plex”). But, a discussion of the attorney-client privilege in the context of mergers and acquisitions starts there.
Precedent
Tekni-Plex was decided in the New York Court of Appeals but related to the attorney-client privilege in a merger of Delaware corporations where the target had a single shareholder. The court distinguished between the privilege that arose in connection with communications concerning general business matters prior to merger negotiations and the privilege that arose in connection with the merger transaction. Absent contrary language in the definitive documentation, the court held that the privilege that arose in connection with general business communications belonged to the buyer (i.e., the surviving entity). But, as to the privilege that applied to the legal representation in the merger, the court said the surviving entity did not succeed to the attorney-client privilege connected with the merger negotiations.
The court applied New York law and made two interesting points that should not be minimized in determining the precedential value of this case: (i) in connection with the merger negotiations, counsel to the acquired entity was contemporaneously representing the sole shareholder in the transaction (thus, if the buyer succeeded to the privilege, the individual shareholder implicitly would be left without the benefit of the privilege), and (ii) “while generally ‘parties who negotiate a corporate acquisition should expect that the privileges of the acquired corporation would be incidents of the sale’ [citing an Illinois federal case], the agreement between the parties here contemplated that, in any dispute arising from the merger transaction, the rights of the acquired corporation, old Tekni-Plex, relating to the transaction would remain independent from and adverse to the rights of new Tekni-Plex.” It is not clear what the court meant by (ii) above, but the notion seems contrary to the basic tenet of a merger that the surviving entity succeeds to all rights and liabilities of the dissolving entity. In effect, once the merger was consummated, there should have been no “old Tekni-Plex” around to hold any rights. Regardless, the court went on to emphasize that its decision was made based on the “facts of this particular transaction and the structure of the underlying agreement.” 89 N.Y.2d at 139.
In Great Hill, the Delaware Court of Chancery held that the surviving corporation in a merger governed by Delaware law owns the attorney-client privilege associated with all pre-merger communications in the absence of language in the Merger Agreement providing differently. Here’s why: Delaware General Corporation Law Section 259(a) provides in part 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. . . .” 80 A.3d at 157 (emphasis added). The Court of Chancery distinguished Tekni-Plex on the basis that the court in that case applied policy rationales to New York’s attorney-client privilege law and did not concern itself with DGCL Section 259. As an aside, the court emphasized the seller’s failure to request that its premerger attorney-client privileged communications be segregated until after the buyer brought the suit – a year after the merger became effective. 80 A.3d at 156. That fact was not cited as a rationale for the decision, but it seems to have influenced the court’s willingness to consider the seller’s argument that it should be deemed to have retained the privilege. My own view is that Tekni-Plex should not be given much weight, even in New York, because of the pains to which the court went to warn readers that the facts of that case were unique. Conversely, it appears that the Delaware Court of Chancery got it right based on a plain reading of the DGCL. The main takeaway from Great Hill is that it behooves M&A counsel to address the attorney-client privilege between the target and its counsel in the definitive documents.
Common Interest Doctrine
If the privilege is adequately addressed in the transaction agreement, there is still more to be done, particularly if the parties provide for typical indemnification and defense by the seller to the buyer. If third-party litigation ensues and the indemnification and defense provisions are triggered, the seller will likely assume control of the defense of the claim subject to an obligation to select counsel reasonably satisfactory to the indemnified party. If the buyer believes a conflict of interest prevents seller’s chosen counsel from representing the buyer’s best interests, it may need to retain its own counsel in the matter. Many indemnification provisions address such possibilities, but they do not typically address the implications of the attorney-client privilege. In that scenario, the indemnifying party, as a non-litigant, could be considered to be outside the attorney-client privileged relationship with attendant ramifications for sensitive communications. The “common interest doctrine” is an attorney-client privilege rationale that may be relied upon in certain indemnification scenarios. The Restatement (Third) of the Law Governing Lawyers, Section 76(1) provides that, “If two or more clients with a common interest in a litigated or non-litigated matter are represented by separate lawyers and they agree to exchange information concerning the matter, a communication of any such client that otherwise qualifies as privileged under Sections 68-72 that relates to the matter is privileged as against third persons.” This concept has been extended to disclosures made in the course of due diligence. The U.S. District Court for the Southern District of California refused to allow the plaintiff in a patent infringement case to discover documents that were earlier revealed during the due diligence phase of an acquisition by one co-defendant (the seller) to another co-defendant (the buyer) declaring that the common interest doctrine applies not just where litigation is pending or imminent, but also where parties to a purchase agreement shared “common legal interests in whether the products that [the successor entity] would market infringed third-party IP, and the communications addressing the scope of the IP certainly were designed to further that interest.” Morvil Technology, LLC v. Ablation Frontiers, Inc., et al., 2012 WL 760603, at 4-5 (S.D. CA 2012).
Application of State Law
Having established that the common interest doctrine is a valid approach to protecting sensitive communications shared in the course of an M&A transaction, the inquiry must continue to determine whether the applicable state law on the topic is as broad sounding as the Restatement. Unfortunately, that is not necessarily the case as neither Texas nor Delaware has adopted the Restatement version of the doctrine. Texas requires that the communications alleged to be covered by the common interest doctrine be made to a lawyer (i) “representing another party in a pending action,” and (ii) “concerning a matter of common interest therein.” In Re XL Specialty Insurance Company and Cambridge Integrated Services Group, Inc., 373 S.W.3d 46, 53 (Tex. 2012), citing Texas Rule of Evidence 503(b)(1)(C). Accordingly, the doctrine does not apply in Texas where the communication is made to the client of an allied lawyer – it must be made to the lawyer. In the cited case, the Texas Supreme Court declared that, “in jurisdictions like Texas, which have a pending action requirement, no commonality of interest exists absent actual litigation.” (Emphasis added.)
In Delaware, the common interest doctrine is codified in Rule 502(b)(3) of the Delaware Uniform Rules of Evidence, which provides: “A client has a privilege to refuse to disclose and to prevent any other person from disclosing confidential communications made for the purpose of facilitating the rendition of professional legal services to the client . . . (3) by the client or the client’s representative or the client’s lawyer or a representative of the lawyer to a lawyer or a representative of a lawyer representing another in a matter of common interest. . . .” Accordingly, it would be difficult to maintain that due diligence disclosures by a non-attorney representative of a seller to non-attorney representatives of a potential buyer should fit within this privilege. The common interest doctrine has been held to apply to communications between two parties to a transaction where their interests are “so parallel and non-adverse that, at least with respect to the transaction involved,” the parties may be regarded as acting like joint venturers. See 3Com Corporation v. Diamond II Holdings, Inc., 2010 Del. Ch. LEXIS 126, at 24-25. That seems to mean that, so long as the parties are negotiating a transaction from opposite sides of the table, there is likely no common interest. So, while Delaware courts are more inclined than Texas courts to apply the common interest doctrine to communications that take place during a transaction, it will not necessarily apply to communications between a buyer and seller during the due diligence and negotiation phase of an M&A transaction, particularly if one could not plausibly maintain that the communication facilitated counsel rendering legal advice to his or her client. The court in 3Com also addressed the question of which state’s attorney-client privilege law should apply. In a scenario where the plurality of the communications at issue seemed to take place in Massachusetts (which takes a less generous view of the common interest doctrine where communications include a client’s investment banker as a participant), the Chancery Court decided to apply Delaware attorney-client privilege law because the parties chose Delaware as the law and forum to apply to disputes arising out of the merger agreement. 2010 Del. Ch. LEXIS 126, at 16-18. One wonders if a Massachusetts court would have taken the same view.
Takeaways
So, what is one to glean from this hodge-podge of rules and case law governing the attorney-client privilege? Here are my takeaways:
- Be careful to wrap information that is being disclosed to a potential buyer and that could become important to the outcome of possible third-party litigation in the future in a shroud of common interest, especially information that is disclosed before a transaction agreement is signed by the parties. Including counsel within the circle of those to whom such information is transmitted is advised, and could be critical depending on the laws of the relevant jurisdiction.
- Sensitive information, such as an attorney’s assessment of the strength of a patent or a client’s position in pending or threatened litigation, should be withheld from the due diligence process until after the transaction agreement is signed in order to bolster the “common interest” element of the doctrine.
- Post-closing ownership of the attorney-client privilege should be addressed in the transaction agreement, and reasonable attempts should be made to cordon off pre-closing attorney-client communications between the seller and its counsel concerning the transaction once the closing occurs.
- The parties should enter into a joint defense agreement if third-party litigation arises and the seller assumes responsibility for the defense in a situation where buyer and seller are separately represented, and if buyer’s M&A counsel is not involved in the litigation, but received sensitive information, it should also be covered by the agreement.
- Pay attention to the attorney-client privilege laws of the jurisdiction where the court that will decide discovery disputes is located. If a court in a state like Texas might require the disclosure of sensitive information, consideration should be given to a change of venue to a jurisdiction with a more generous application of the common interest doctrine.
Published July 17, 2015.
