Delaware Court of Chancery Upholds a Seller’s Use of Contractual Provisions to Maintain Attorney-Client Privilege Over Premerger Communications

In a recent decision, the Delaware Court of Chancery ruled that the seller in a merger could enforce a provision in the merger agreement protecting its privilege over premerger emails with its counsel. Although pursuant to Section 259 of the Delaware General Corporation Law, privilege over attorney-client communications generally transfers to the surviving entity, the court’s ruling affirms that parties can use their “contractual freedom” to avoid waiving privilege over premerger attorney-client communications. Shareholder Representative Services LLC v. RSI Holdco, LLC, C.A. No. 2018-0517-KSJM (Del. Ch. May 29, 2019).  

Background

In September 2016, RSI Holdco, LLC (RSI), acquired Radixx Solutions International, Inc. (Radixx). Through the merger, RSI gained possession of Radixx’s computers and email servers that included numerous premerger emails between Radixx and its counsel discussing the transaction. The emails were not removed or segregated from Radixx’s other communications at the time the merger closed. RSI subsequently tried to use those communications in post-merger litigation against Radixx. However, Radixx argued that RSI was prevented from doing so by the following provision in the merger agreement:

Any privilege attaching as a result of [counsel] representing [Radixx] . . . in connection with the transactions contemplated by this Agreement shall survive the [merger’s] Closing and shall remain in effect; provided, that such privilege from and after the Closing shall be assigned to and controlled by [Representative]. In furtherance of the foregoing, each of the parties hereto agrees to take the steps necessary to ensure that any privilege attaching as a result of [counsel] representing [Radixx] . . . in connection with the transactions contemplated by this Agreement shall survive the Closing, remain in effect and be assigned to and controlled by [Representative]. As to any privileged attorney client communications between [counsel] and [Radixx] . . . prior to the Closing Date (collectively, the “Privileged Communications”), [RSI], the Merger Subsidiary and [Radixx] (including, after the Closing, the Surviving Corporation), together with any of their respective Affiliates, successors or assigns, agree that no such party may use or rely on any of the Privileged Communications in any action or claim against or involving any of the parties hereto after the Closing.

The issue before the court was whether this provision protected Radixx’s attorney-client privilege over the emails in question or whether Radixx had waived its privilege by failing to remove the emails from its servers before transferring them to RSI.  

Analysis

The court based its ruling on its decision in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155 (Del. Ch. 2013). In Great Hill, the Court of Chancery ruled that attorney-client communications found by the buyer on the seller’s computers could be used by the buyer against the seller in post-merger litigation between the parties. The court held that pursuant to Section 259 of the Delaware General Corporation Law, privilege over attorney-client communications transfers to the surviving entity unless the parties include an explicit carve-out to the contrary. Because the seller in Great Hill failed to include such a carve-out in the merger agreement, the court in that case held that the privilege was waived.

In RSI Holdco, the court found that the seller (Radixx) heeded the Great Hill court’s advice by using its “contractual freedom” to retain privilege over the emails transferred to RSI. Unlike in Great Hill, the merger agreement in RSI Holdco included an express provision protecting the seller’s privilege in a post-merger dispute, and the court found that the seller’s privilege was not waived. In particular, the Court of Chancery found that the provision used by Radixx in the merger agreement accomplished four things: (i) it preserved any privilege attaching to premerger communications between the seller and its counsel, (ii) it assigned control over those privileges to a representative on behalf of the selling stockholders, (iii) it required the seller and the buyer to take steps to ensure that the seller’s privileges remain in effect, and (iv) it expressly prohibited the buyer from using or relying on the privileged communications in a post-closing litigation with the seller.  

Conclusion

Sellers in M&A transactions should take note of the ruling in RSI Holdco in order to prevent waiving their attorney-client privilege over pre-closing communications transferred to acquirers. A well-drafted provision protecting privileged communications should hew closely to the provision used by Radixx and cited by the Court of Chancery in its decision, and take care to include the four levels of protection enumerated therein.