Protecting the Privilege of Pre-Merger Communications

When Company A acquires Company B, in many cases it will also come to share in the attorney-client privilege formerly belonging to Company B. This general rule is considered by many to be necessary and beneficial for successful mergers and the succeeding company’s ongoing operations. A caveat and contested exception to the rule concerns Company B’s communications with its attorneys concerning the merger itself. Can the surviving company access the privileged communications regarding the merger between the acquired company and its attorneys? Only a handful of courts across the country have answered that specific question. On the one hand, the New York Court of Appeals determined that permitting the successor company to possess those communications would significantly chill attorney-client communications during the transaction process. On the other, the Delaware Court of Chancery concluded that those communications were the property of the surviving company, relying on the terms of a statute providing that the successor company acquires all privileges of the preceding constituent corporations. Texas courts have similarly recognized that “[i]n a merger, the privileges, powers, rights, and duties of the corporation are transferred to the surviving corporation and are there continued and preserved.” In re Cap Rock Elec. Co-op., Inc., 35 S.W.3d 222, 228 (Tex. App. 2000) (quoting Bailey v. Vanscot Concrete Co., 894 S.W.2d 757, 759 (Tex.1995)). Thus, there may be a risk that attorneys’ communications with their clients regarding a merger may ultimately end in the possession of the acquiring company, if not protected. Communications Concerning The Merger May Not Be Protected Nationwide, those courts that have reviewed this issue are split. In Tekni-Plex, Inc. v. Meyner & Landis, the New York Court of Appeals recognized that the privilege generally belonged to the surviving company post-merger, but created an exception for those communications relating to the merger itself. This was because “to grant new [corporation] control over the attorney-client privilege as to communications concerning the merger transaction would thwart, rather than promote, the purposes underlying the privilege.” 89 N.Y.2d 123, 138–39, 674 N.E.2d 663, 671 (1996). The Delaware Court of Chancery took the opposite view. Although not the highest court in the state, the Court of Chancery is highly regarded nationally concerning corporate matters given its specialty on that area of the law and Delaware’s unique status as a hub of corporate activity. In Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155 (Del. Ch. 2013), Company A brought litigation against Company B post-merger, claiming that there was fraud during the negotiations. Company A then sought communications from Company B’s employees and officers with their attorneys during the negotiations to support its case. The Court of Chancery sided with Company A, and primarily relied on a Delaware statute, which provides that after a merger “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 . . .” Del. Code. tit. 8, § 259. The court concluded that since the statute was unambiguous in its use of the word “privileges,” it would not create an exception for certain attorney-client communications, i.e. those related to the merger. These decisions provide insight for corporate attorneys and clients seeking to minimize the risk that their communications will be disclosed in subsequent litigation. Actions Attorneys Can Take Before the Merger To Protect The Privilege There may be nontrivial consequences for unexpected waiver of the privilege, especially concerning unsavory communications related to a merger that is later being litigated. To prevent this exposure, many attorneys will consider the following actions to limit that risk. When drafting the engagement letter or preparing other opinions to the corporate client in conducting due diligence, corporate attorneys can consider whether there is a risk that the successor corporation may in the future have access to the premerger communications. Attorneys can also consider whether certain communications are sent in furtherance of a representation that is not strictly a corporate representation. That is, if the attorneys are representing individuals at the corporation in their individual capacity, and can document as such, the attorneys can review whether the individuals may be able to protect their communications from future disclosure. Attorneys may also draft nondisclosure documents or transaction documents in a manner that shields certain premerger communications. Since corporate clients may not want all of their communications to be disclosed, this can guard against the chilling effect that concerned the Tekni-Plex court and allow attorneys to fully advise their clients concerning the merger. Indeed, many courts have recognized the ability of parties to contract around limitations such that the parties may specifically note in the transaction documents that the merging company’s privileged communications relating to the merger will remain protected after the deal is resolved. Finally, attorneys may consider what jurisdiction’s law should apply to the merger, as that may impact whether and which communications are disclosed. For those states that have decidedly resolved this issue one way or the other, the attorneys and clients can determine whether a different state’s law is more applicable to the goals of the transaction. Shari L. Klevens is a partner at Dentons and serves on the firm's US Board of Directors. She represents and advises lawyers and insurers on complex claims and is co-chair of Dentons' global insurance sector team. Alanna Clair is a partner at Dentons and focuses on professional liability defense. Shari and Alanna are co-authors of "The Lawyer’s Handbook: Ethics Compliance and Claim Avoidance."