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Attorney Client Privilege for Sale – Best Offer: How to Protect Attorney Client Privilege When Selling Your Business

Posted February 28, 2024 at 1:52 PM

Business & Tax, News & Events

Imagine that you sell your business.  Then imagine that a dispute arises after the sale and that the purchaser wants to introduce in a lawsuit pre-closing communications between you and your attorney.  No chance, right?  These communications must be privileged.  Not so fast.

Consider the case of Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155 (Del. Ch. 2013).   In this case, purchaser brought suit against seller alleging fraudulent inducement in connection with purchaser’s acquisition of the target company through a merger transaction.  In support of its suit, purchaser intended to introduce several pre-closing communications between seller and its legal counsel which purchaser discovered on the target company’s e-mail servers.  The court ultimately ruled that seller could not prevent disclosure of the communications at issue because the attorney-client privilege with respect to such communications passed to (or was acquired by) purchaser upon the closing of the merger transaction and there was no express carve out.

The court focused in part on the language of Section 259 of the Delaware General Corporation Law, which provides, in relevant part, that, upon the consummation of a merger transaction, “all . . . rights, privileges, powers and franchises of each [constituent corporation] . . . shall be vested in the corporation surviving or resulting from such merger.”  Accordingly, the court found that the surviving company in the merger transaction acquired all rights and privileges of the target company, including the attorney-client privilege attaching to target company’s pre-closing communications with legal counsel.

It is important to note that this situation is not unique to a merger transaction.  In a stock acquisition, for example, the acquirer effectively steps into the shoes of the target company, which, like in the merger transaction, would include all rights, privileges, powers, etc. of the target company.

The good news, however, is that there are steps that can be taken to preserve the attorney-client privilege for the seller.  Let’s look at a couple of examples:

First: In Great Hill, if you recall, purchaser discovered the communications at issue on the target company’s email servers.  Seller could have avoided this problem if it established communications with legal counsel from the outset via non-company based email servers, such as a private Gmail or other email account.  In fact, the court in Great Hill made note that “there is no evidence that the Seller took any steps to segregate these communications before the merger.”  Had it done so, the case may have been decided differently.   

Second: In addition to using non-target company email servers for legal communications, the issue of who owns the attorney-client privilege post-closing can also be addressed in the purchase agreement.  For example, in an unreported opinion from the Delaware Chancery Court, Shareholder Representative Services, LLC v. RSI Holdco, LLC, C.A. No. 2018-0517-KSJM, the court considered similar arguments as raised in Great Hill, but in this case the merger agreement included express language that the attorney-client privilege survived the closing and remained in effect. As a result of this language, the court found that seller retained the privilege over the email communications at issue.

Recommendation
In light of the foregoing, if you plan to sell your business, it is extremely important that you take steps from the outset to ensure that you retain the attorney-client privilege with respect to pre-closing communications with legal counsel.  Failure to do so can be disastrous if a post-closing dispute arises with respect to the sale transaction. 

How MM&C Business Attorneys Can Help
Please contact Miller, Miller & Canby should you have any question dealing with the sale of a business. Kevin D’Anna is a Principal at Miller, Miller & Canby and a member of the firm’s Business & Tax and Real Estate (finance) practice groups. Kevin regularly advises financial institutions in connection with asset-based, real estate, and USDA and SBA guaranteed loan transactions.  In addition, he has become trusted outside counsel for local and regional businesses of varying size and industry, providing legal advice on business formation, mergers, acquisitions or disposition, and complex business transactions. He may be reached at kkdanna@mmcanby.com.

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