Consider how to address pre-merger communications

In the midst of contentious and high-stakes merger discussions, an attorney and his or her pre-merger client often operate under the assumption that their communications will be protected by the attorney-client privilege. However, without adequate foresight, the client may find that the ability to control the attorney-client privilege is now in the hands of the acquiring or successor corporation.

The potential risks are obvious. It is not uncommon for disputes to arise between the merging corporations in which case the communications between the pre-merger corporation and its attorney may be placed at issue. All of a sudden, statements by the client that were never intended to see the light of day may be discoverable in a subsequent lawsuit. The client in that situation may have some questions for its attorney as to why those communications were not protected from disclosure.

In the corporate context, there are certainly scenarios in which the client may lose control of the attorney-client privilege. For example, in connection with bankruptcy proceedings, trustees and receivers have been vested with the rights of the corporation to waive the privilege or to learn the content of otherwise protected communications. Because these successors-in-interest literally step into the shoes of the corporation, it is perhaps less surprising when courts conclude that the corporation, through a trustee or receiver, could waive the attorney-client privilege or discover the content of the prior communications.

However, the potential loss of the attorney-client privilege for pre-merger communications is more unsettling because the privilege may pass to a party that was an adversary of the holder of the privilege up until the point that the merger was effected. In other words, the communications may, at best, create some unpleasantness when disclosed. At worst, they may provide evidence in support of a claim by the acquiring or successor corporation against the pre-merger corporation.

Such was the case in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, C.A., a decision that has been the subject of much discussion since it was issued in 2013. In Great Hill, the Delaware Court of Chancery (following both Delaware and California law) considered whether a plaintiff successor corporation was entitled to communications between the corporate officers of the defendant pre-merger corporation and its attorneys prior to the merger. The successor corporation sought such communications to support its claim that the merger was a result of the acquired corporation's fraud during negotiations.

While the acquired corporation argued that its pre-merger privilege survived the merger, the successor corporation responded that the attorney-client privilege was part of the assets acquired by the successor corporation. The Delaware Chancery Court agreed with the successor corporation, 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 pre-merger communications between the acquired corporation and its attorneys.

The decision in Great Hill amounted to a warning shot to attorneys handling mergers and acquisitions. However, whether the holding in Great Hill will apply can turn on a variety of factors. For example, the applicable statute in states other than Delaware and California may compel a different result. In addition, some courts may decline to allow the privilege to transfer to the successor corporation on public policy grounds, although even courts that prohibit the assignment of legal malpractice claims have allowed such claims to be acquired through a purchase of assets.

Regardless of the jurisdiction, there are steps that attorneys can take to avoid uncertainty and to minimize the potential risks. First, attorneys may wish to warn their clients at the outset of a merger or acquisition representation of the risk that the successor entity might be entitled to discover the content of all pre-merger communications. This can be included in an engagement letter or in separate correspondence that addresses the risks and exposures of the transaction. The goal is to avoid a situation where the client is blindsided by a ruling requiring the disclosure of communications that the client was sure were privileged.

Next, attorneys and their clients can attempt to address the issue through either a non-disclosure agreement or in the transaction documents. Indeed, in Great Hill, the court observed that the parties had "contractual freedom" with respect to the terms of their agreement and thus could choose to exclude attorney-client communications from the assets transferred in connection with the merger.

California courts have likewise found that provisions in the merger documents can protect the acquired corporation's privileged communications. Relying on Great Hill, the U.S. District Court for the Central District of California concluded that confidentiality provisions included in the acquisition documents allowed the acquired corporation to retain control over pre-closing communications. Sentinel Offender Services, LLC v. G4S Secure Solutions, Inc., SACV14298JLSJPRX (C.D. Cal. Sept. 3, 2015).

Accordingly, rather than letting the applicable statute control, attorneys and their clients can take a proactive approach by negotiating for the inclusion of a provision specifying that all pre-merger communications shall remain privileged and that such a provision will survive the transaction, should it occur. Certainly, at least attempting to negotiate such a provision can help the attorney combat any suggestion by the pre-merger company client that she or he should have done more to protect pre-merger communications.

The propriety of allowing the attorney-client privilege to pass through to successor corporations will likely continue to be debated and addressed in subsequent decisions. In the meantime, however, attorneys handling mergers and acquisitions can limit their risks by making sure that they discuss the issue with their client at the beginning of every representation.