Selling Your Company? Make Sure Your Deal Protects Privileged Communications.

The Delaware Court of Chancery, one of the most sophisticated and influential venues for the resolution of corporate disputes, has held that when one company acquires another, privileged communications between the acquired company and its attorneys are not protected during subsequent litigation between the companies unless the merger agreement contained a term providing otherwise. While the acquired company holds the privilege as long as it remains a separate entity, control over privileged communications passes to the acquiring company at the time of the acquisition, along with other company assets.

This issue arose recently in Great Hill Equity IV, LP v. SIG Growth Equity Fund I, LLLP, in which the acquiring company had a case of “buyer’s remorse” following the deal after discovering what it believed to be evidence of fraud on the part of the acquired company. The evidence consisted of pre-acquisition communications between the acquired company and its legal counsel. In a subsequent lawsuit between the two corporations, the acquired company cited attorney-client privilege in its efforts to prevent the introduction of those communications into evidence. In holding that those pre-acquisition communications were no longer privileged, the Court of Chancery noted that “all property, rights, privileges, and all and every other interest shall be thereafter as effectually the property of the surviving or resulting corporation.”

Because “privileges” are specifically listed under the Delaware statute, otherwise-protected communications between the acquired company and its counsel are available for use by the acquiring company during litigation in the absence of a clear carve-out in the acquisition agreement that preserves the privilege. Because the Delaware Court of Chancery handles so many corporate law matters and operates in the state of incorporation of a majority of Fortune 500 companies, the holding in Great Hill Equity provides a roadmap that should interest all business owners. In order to ensure the continued privilege of pre-acquisition communications, the parties should take steps to negotiate, agree upon, and include in their acquisition agreement a term that provides for such a continuation of the privilege. Otherwise, the rights to those communications will be transferred to the acquiring company just like any other property, and could cause serious problems.

Frank Gulino joined Berenzweig Leonard as an associate attorney in 2013. He can be reached at FGulino@BerenzweigLaw.com.