A particularly interesting issue arises when the underlying ownership of the autonomous enterprise passes from one group to another, resulting in changes in management. The issue was recently considered by the Delaware Chancery court in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLP, C.A. No. 7906 (Nov. 15, 2013) (Del. Ch.). The opinion in that case, written by, Chancellor Strine, is bound to have a substantial influence on the ongoing judicial discussion of attorney client privilege in the context of entity representation in general, and more specifically, on the practices of lawyers in managing control of that privilege in the context of corporate transactions. It is also a great lesson in record keeping in the current environment of digital records.
Though the extent and application of the normative choices made by Chancellor Strine may be questioned, and strongly (e.g., Tekni-Plex, Inc. v. Meyner & Landis, 674 N.E.2d 663 (N.Y. 1996)), the influence of the opinion is less likely to be challenged. The opinion is also remarkable for its aggressive insistence ("The lady doth protest too much, methinks." Hamlet act III, scene II) of the use of a plain meaning rule of statutory construction in an area where the meaning and application of the statutory framework is anything but clear. (On the distinctions between formalism and functionalism in statutory Interpretation see HERE). But in the end, the most interesting aspect of the case is the way in which law is understood as open textured enough to permit private governance through contract. Chancellor Strine's narrow and tightly woven legalism expands the corporate law's more open textured structures, within which private governance regimes may be constructed in the shadow of and beyond law, to statutory behavior and expectation management rules.
This post includes a brief framework for consideration the case, the text of Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLP, C.A. No. 7906 (Nov. 15, 2013) (Del. Ch.) and some practical analysis of the consequences of the case publicly circulated by leading U.S. lawyers and law firms.
Though the language of the opinion is couched in the technical language of statutory interpretation, the underlying conceptual issues and choices among structuring premises make the case far more interesting, and important. For in choosing the approach to interpretation, the Chancellor is also choosing among normative approaches to the issues of enterprise personality and its consequences for its legal relationships, especially among its stakeholders.
If the entity continues unchanged but its former owners and managers are replaced, to whom does the attorney-client privilege run? An enterprise as person centered perspective might suggest that it is retained by the entity, irrespective of changes in ownership or management. This is essentially a formalist analytical approach. Those changes are irrelevant as long as the institution remains unchanged. This is a perspective that also conflates public and private law views of entities, be they states or corporations. It's value (perhaps substantial) is its simplicity. With a focus on the enterprise itself as autonomous, the relationships among other critical stakeholders through which the enterprise actually functions, is diminished and recharacterized as proceeding from out of, rather than as essential to, the autonomy of the enterprise itself. The approach deepens a commitment to a view of corporate personality away from the notion that the corporation is property in the hands of shareholders, to the institutional notion that the enterprise exists beyond its stakeholders--especially shareholder5s, managers and board members. But there are inefficiencies as well. Such a view suggests that every interaction between enterprise and those individuals who are charged with its directions are always potentially adverse. And the changing character of those interactions will only be definitively resolved after the fact in litigation. That is the great tragedy, for example, in the current litigation among the former university President, the former university general counsel and the university over the role of the general counsel and the character of advice she provided. Mike Dawson, "Judge to consider whether Cynthia Baldwin represented Penn State or Graham Spanier in Sandusky case,"supra.
But a functional approach might suggest a more nuanced analysis. That would start with the idea that the entity is itself not merely the institutional architecture of the corporation, but a stable cluster of investors, managers and officers. Where there is a substantial change in any of them (for example, through public offering of a previously private enterprise, where directors are replaced through sale to tender offer, etc.) the fundamental character of the enterprise itself changes. Where that change is substantial enough, then the emerging enterprise is not the same as its predecessor and the attorney-client privilege might not legitimately pass to it. This perspective focuses on the actual realities of corporate operation, one in which the abstraction of the enterprise is itself only incarnated through the actions of its key stakeholders. It suggests the complexities of agency in that relationship but also that agency here is multi-factorial, that is that it tends to run not to a single "person" but to clusters of persons acting together to form an enterprise. But this functional approach, perhaps closer to the sociological realities of enterprises than the formal approach, is substantially more difficult to manage in the courts. It requires a balancing of a variety of factors and would likely produce substantial litigation that itself would reduce the efficiencies of firm operation. It is for that reason, if for no other, that it is likely that courts, when faced with this issue, will tend to gravitate toward the more straightforward formalist approach. Yet, as Chancellor Strine suggests (slip op. at Page 8-10 below) the answer to these difficult questions may be avoided entirely if the legislative will is understood merely as a default position from which the parties may contract around to suit their interests (subject of course to their relative bargaining power).
The Case Opinion:
Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLP, C.A. No. 7906 (Nov. 15, 2013) (Del. Ch.) Page references are to the slip opinion.
Date Submitted: October 15, 2013
Date Decided: November 15, 2013
Gregory V. Varallo, Esquire, Rudolf Koch, Esquire, Thomas A. Uebler, Esquire, Robert L. Burns, Esquire, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware, Stephen D. Poss, Esquire, Kathryn L. Alessi, Esquire, Adam Slutsky, Esquire, GOODWIN PROCTER LLP, Boston, Massachusetts, Attorneys for Plaintiffs Great Hill Equity Partners IV, LP, Great Hill Investors LLC, Fremont Holdco, Inc., and BlueSnap, Inc. (f/k/a Plimus).
David J. Margules, Esquire, BOUCHARD MARGULES & FRIEDLANDER, P.A., Wilmington, Delaware, Attorneys for Defendants SIG Growth Equity Management, LLC, SIG Growth Equity Fund I, LLLP, Amir Goldman, Jonathan Klahr, Donors Capital Fund, Inc., Kids Connect Charitable Fund, Daniel Kleinberg, and Tomer Herzog.
David S. Eagle, Esquire, Sean Brennecke, Esquire, KLEHR HARRISON HARVEY BRANZBURG LLP, Wilmington, Delaware, Attorneys for Defendants Hagai Tal and Irit Segal Itshayek.
[Page 1:] The plaintiffs, Great Hill Equity Partners IV, LP, Great Hill Investors LLC, Fremont Holdco, Inc., and Bluesnap, Inc. (for clarity, collectively the “Buyer”), have filed this suit alleging that the defendants, former shareholders and representatives of Plimus, Inc. (for clarity, collectively the “Seller”), fraudulently induced the Buyer to acquire Plimus, Inc. (“Plimus”) in September 2011. Plimus was the surviving corporation in the merger.
After the Buyer brought this suit in September 2012—a full year after the merger —it notified the Seller that, among the files on the Plimus computer systems that the Buyer acquired in the merger, it had discovered certain communications between the Seller and Plimus‟s then-legal counsel at Perkins Coie regarding the transaction. During that year, the Seller had done nothing to get these computer records back, and there is no evidence that the Seller took any steps to segregate these communications before the merger or excise them from the Plimus computer systems, the control over which was passing to the Buyer in the merger. It is also undisputed that the merger agreement lacked any provision excluding pre merger attorney-client communications from the assets of Plimus that were transferred to the Buyer as a matter of law in the merger, and the merger was intended to have the effects set forth in the Delaware General Corporation Law (“DGCL”).1 Nonetheless, when the Seller was notified that the Buyer had found [Page 2:] pre-merger communications on the Plimus computer system, the Seller asserted the attorney-client privilege over those communications on the ground that it, and not the surviving corporation, retained control of the attorney-client privilege that belonged to Plimus for communications regarding the negotiation of the merger agreement. Before the court is a motion by the Buyer seeking to resolve this privilege dispute and determine, among other things, that the surviving corporation owns and controls any pre-merger privilege of Plimus or, alternatively, that the Seller has waived any privilege otherwise attaching to those pre-merger communications.2
The question before the court is thus an issue of statutory interpretation in the first instance. Section 259 of the DGCL provides that following 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 . . . .”3 Nonetheless, the Seller contends that the statutory term “all ... privileges” does not include the attorney-client privilege, and claims that the Seller still retains control over that particular subset of Plimus‟s privileges, or, as shall be seen, at least the portion of that subset consisting of attorney-client communications regarding the merger negotiations. At oral argument, the Seller suggested without citation that the General Assembly actually intended the “privilege” referred to in § 259 of the DGCL to include [Page 3:] only certain property rights, and that it did not extend to privileges established by a rule of evidence.4 But, when asked, the Seller was not able to cite any legislative history that supported its narrow reading of the statute,5 and the court has not been able to find any evidence for its suggested interpretation in the leading treatises.6 Most importantly, the [Page 4] Seller‟s reading is not a plausible interpretation of the plain statutory language. That language uses the broadest possible terms to make sure that “all” assets of any kind belong to the surviving corporation after a merger. The Seller‟s attempt to interpret the word “privileges” to mean “property rights” ignores the reality that the word “property” is already specifically used in the statute, as is the term “rights”—and then these terms are expanded still further to include “ all and every other interest.” The definition of “all” is well known, and means “the whole amount, quantity, or extent of.”7 There is a presumption that the General Assembly carefully chose particular language when writing a statute, and this court will not construe the statute to render that language mere surplusage if another interpretation is reasonably possible.8 The term “privilege” is commonly defined as “a right or immunity granted as a peculiar benefit, advantage, or favor,”9 and one of the most obvious examples is the attorney-client privilege.10 To [Page 5] indulge the Seller's argument would conflict with the only reasonable interpretaiton of the statute, which is all means all as to the enumerated categories, and that this includes all privileges, including the attorney-client privilege.
In the face of the statutory language, the Seller cites two cases in support of its argument, which it claims stand for the proposition that the former stockholders of a selling corporation retain the selling corporation‟s privileges as to any attorney-client communications regarding the negotiation of the merger.11 In particular, the Seller relieson a decision of the New York Court of Appeals, Tekni-Plex, Inc. v. Meyner & Landis, which dissected the privileges belonging to a Delaware corporation that was sold in a merger into two categories, and held that only one category, i.e., less than all, passed to the surviving corporation in the merger.12 Tekni-Plex held that the privilege over attorney-client communications regarding general business operations did pass to the surviving corporation in the merger.13 But then the Court of Appeals innovated and, without citing § 259, concluded that the pre-merger attorney-client communications regarding the merger negotiations did not pass to the surviving corporation for policy reasons related to its analysis of New York attorney-client privilege law.14 The Seller also cites Postorivo v. AG Paintball Holdings, Inc., a decision [Page 6:] of this court that applied Tekni-Plex.15 But in Postorivo, the court did not take a stand on whether Tekni-Plex would be correct under Delaware law, because it was not necessary to do so under the facts of that case. There, the court was applying New York law to an asset purchase agreement that excluded certain assets,16 rather than a merger that included all assets, and the parties had agreed that under the specific contractual terms of their transaction, the seller retained the attorney-client privilege over communications relating to the negotiation of the transaction.17 Thus, as was the case in Tekni-Plex, Postorivo did not even cite § 259 of the DGCL.
The Buyer answers the Seller‟s arguments about these cases with a dispositive response: it points out that the General Assembly‟s statutory determination leaves no room for judicial improvisation.18 The Buyer contends that under the plain terms of §259 of the DGCL, the attorney-client privilege—like all other privileges —passes to the surviving corporation in the merger as a matter of law.19 Thus, the Buyer argues, this [Page 7:] court must enforce the statute. The court agrees. If the General Assembly had intended to exclude the attorney-client privilege, it could easily have said so.20 Instead, the statute uses the broadest possible language to set a clear and unambiguous default rule: all privileges of the constituent corporations pass to the surviving corporation in a merger. Tellingly, the Seller admits that the attorney-client privilege has transferred to the surviving corporation for at least some purposes, and the Seller conceded at oral argument that the surviving corporation would, in fact, be able to access and use these same documents if it was necessary to defend itself against a third party.21 But this concession means that the Seller, like the Court of Appeals in Tekni-Plex, is not allowing the surviving corporation to receive “all” of the “privileges of Plimus in the merger, but only the subset that the judiciary has deemed acceptable to transfer. Thus, “all. . . privileges” in § 259 of the DGCL would become “all . . . privileges, minus judicially-created exceptions.” Whatever the case may be in other states, members of the Delaware judiciary have no authority to invent a judicially-created exception to the plain words “all. . . privileges” and usurp the General Assembly‟s statutory authority.22
[Page 8:] The Seller claims that giving effect to § 259 of the DGCL will create serious public policy issues.23 But, as has long been recognized by the Delaware Courts, when the General Assembly has addressed an issue within its authority with clarity, there is no policy gap for the court to fill.24 If a valid statute is not ambiguous, the court will apply the plain meaning of the statutory language to the facts before it.25 It would usurp the authority of our elected branches for this court to create a judicial exception to the words “all . . . privileges” for pre-merger attorney-client communications regarding the merger negotiations. That sort of micro-surgery on a clear statute is not an appropriate act for a court to take.
Of course, parties in commerce can —and have—negotiated special contractual agreements to protect themselves and prevent certain aspects of the privilege from transferring to the surviving corporation in the merger. The Buyer submitted several excerpts from private company merger transactions that contained provisions excluding [Page 9:]pre-merger attorney-client communications regarding the negotiation of the transaction from the assets to be transferred to the surviving corporation and explicitly acknowledging that the attorney-client privilege for those documents would belong solely to the seller after the merger.26 Furthermore, one of the cases cited by the Seller demonstrates that parties already know how to protect themselves from this situation. In Postorivo, the transactional agreements specifically retained the attorney-client privilege for communications regarding the negotiation of the transaction, so that particular element of the privilege did not pass to the surviving corporation as an incident of the sale.27 The question in that case, rather, was whether a selling party that had contractually negotiated to retain the privilege waived the rights it had preserved by contract through its failure to take steps to ensure that the privileged information did not actually pass into the possession of the buyer.28
Notably, in the immediate wake of Postorivo and Tekni-Plex—and before the parties began negotiating this transaction —several articles were written encouraging practitioners to take privilege issues into account when negotiating a merger agreement.29 Well before Tekni-Plex, the United States Supreme Court had uttered these plain words:
“[W]hen control of a corporation passes to new management, the authority to assert and waive the corporation‟s attorney-client privilege passes as well. New managers installed as a result of a takeover, merger, loss of confidence by shareholders, or simply normal succession, may waive the attorney-client privilege with respect to communications made by former officers and directors. Displaced managers may not assert the privilege over the wishes of current managers, even as to statements that the former might have made to counsel concerning matters within the scope of their corporate duties.30Thus, the answer to any parties worried about facing this predicament in the future is to use their contractual freedom in the manner shown in prior deals to exclude from the transferred assets the attorney-client communications they wish to retain as their own.31Here, by contrast, the Seller did not carve out from the assets transferred to the surviving corporation any pre-merger attorney-client communications, and this court will not unilaterally read such a carve out into the parties‟ contract.32 Absent such an express carve out, the privilege over all pre-merger communications—including those relating [Page 11:] to the negotiation of the merger itself—passed to the surviving corporation in the merger, by plain operation of clear Delaware statutory law under § 259 of the DGCL.
The Seller also argues that waivers of the attorney-client privilege are not lightly inferred,33 and that irrespective of the fact that the Seller in this case did nothing to preserve the privilege —either in terms of i) negotiating a provision in the merger agreement that pre-merger attorney-client communications made in connection with the negotiations did not pass to the surviving corporation in the merger and would remain privileged except as waived by the surviving corporation, or ii) by taking any action to ensure that those attorney-client communications did not pass to the surviving corporation in bulk and remain in the surviving corporation's full possession and control for an entire year—that the Seller has nonetheless not waived the privilege. But having decided that the attorney-client privilege for the documents passed as a matter of law to the surviving corporation in the merger, these waiver-related arguments need not be addressed, including the substantial issue of whether the Seller waived the privilege through its lengthy failure to take any reasonable steps to ensure the Buyer did not have access to the allegedly privileged communications.
[Page 12] For all these reasons, the Buyer's motion for disposition of privilege dispute is granted.34
IT IS SO ORDERED.
1. Plimus was a California corporation, and the Buyer was a Delaware corporation. Thus, the Merger Agreement provided that “[t]he Merger shall have the effects set forth in this Agreement and in the applicable provisions of the DGCL and the [California General Corporation Law (“CGCL”)].”). Merger Agreement § 2.02, Effects of the Merger. The Buyer has represented that the CGCL“effectively follows” the DGCL on this point, see Oral Arg. Tr. 6:13 -15, and the Seller has not argued that the result would be different under the CGCL. Section 12.07 of the Merger Agreement also provided that “[a]ll disputes, controversies, issues and questions concerning the construction, validity, interpretation and enforceability of this Agreement . . . shall be governed by and construed in accordance with the Laws of the State of Delaware . . . .”
2. The Buyer also argued that the Seller‟s privilege logwas inadequate, and that the documents in dispute should be reviewed by a Master to determine whether the crime-fraud exceptionn to attorney-client privilege would apply.
3. 8 Del. C. § 259.
4. Oral Arg. Tr. 64:8-17 (“I think we have to look at whether [§] 259(a) is really talking about the same kind of privilege that we‟re talking about here. It talks about property rights. ... I don‟t think it‟s talking about a rule of evidence, which is what the attorney-client privilege is.”); Oral Arg. Tr. 66:5-12 (“An easement ...A privilege to use land, for example, is something that belongs and can be sold, belongs to the property rights. That is a —that has often been defined as a privilege. A use of a copyright has often been defined as a privilege. And, therefore, what I think the statute might be talking about is those kind of privileges.”).
5. Oral Arg. Tr. 65:15-20.
6. See, e.g., R.FRANKLIN BALOTTI & JESSE A. FINKELSTEIN, DELAWARE LAW OF CORPORATIONS & BUSINESS ORGANIZATIONS § 9.26, Effects of Merger (2013) (“Section 259(a) further provides for the transfer, as a matter of law, to the surviving or resulting corporation of all of the „rights, privileges, powers and franchises as well of a public as of a private nature...”) (emphasis added); DAVID A. DREXLER, LEWIS S. BLACK, JR. & A. GILCHRIST SPARKS, III, DELAWARE CORPORATION LAW AND PRACTICE § 35.07, Effect of Merger on Rights and Liabilities of Constituent Corporations (2009) (noting that “[t]he property passing to the surviving corporation also includes contractual rights and other choses in action, as well as any „privileges, powers and franchises as well a public as of a private nature‟‟”) (emphasis added); EDWARD P. WELCH, ET AL., FOLK ON THE DELAWARE GENERAL CORPORATION LAW § 259.2 (5th ed. 2008), Survival of rights of a constituent corporation (“The concept of continuing the life, but not the separate identity, of the merged corporation finds statutory expression in the provision that the new or surviving corporation „possess[es] all the rights, privileges, powers and franchises as well of a public as of a private nature‟ previously belonging to or enjoyed by the constituent corporation. In a merger or consolidation, all rights of the constituent corporation are transferred to the surviving corporation by operation of law...”) (emphasis added); see also 19 C.J.S. CORPORATIONS § 909, Succession to rights, privileges, and property (2013) (“The usual effect of a consolidation or merger is that the new corporation succeeds to the rights, powers, privileges and immunities of each of the original corporations, except as provided by the limitations of the new corporation‟s charter. ... The new corporation takes the rights, powers, privileges, and immunities of the constituent corporations.”) (emphasis added); 15 FLETCHER CYCLOPEDIA OF THE LAW OF CORPORATIONS § 7095, Exemptions and immunities passing to new company (2013) (noting that “[t]he modern corporation statutes in a number of jurisdictions expressly provide that, upon a statutory merger or consolidation, the surviving or new corporation shall thereupon and thereafter possess all the rights, privileges, immunities and franchises, both of a public as well as of a private nature, of each of the merging or consolidating corporations” and citing 8 Del. C.§ 259 as an example) (emphasis added). One treatise expressly declares that “[u]nder a provision giving a consolidated corporation the rights, franchises, privileges and property of the consolidating corporations, orwithout such a provision, and in the absence of provision to the contrary, the consolidated corporation acquires ... the absorbed corporation‟s attorney-client privilege.” 15. FLETCHER CYCLOPEDIA OF THE LAW OF CORPORATIONS § 7089, Powers and rights acquired (2013).
7 Merriam-Webster Online Dictionary, http://www.merriam-webster.com/dictionary/all (last visited Nov. 14, 2013).
8. Taylor v. Diamond State Port Corp., 14 A.3d 536, 538 (Del. 2011); Oceanport Indus., Inc. v.
Wilmington Stevedores, Inc. , 636 A.2d 892, 900 (Del. 1994).
9. Merriam-Webster Online Dictionary, http://www.merriam-webster.com/dictionary/privilege (last visited Nov. 14, 2013);see also BLACK'S LAW DICTIONARY 1234-35 (8th ed. 2004) (defining “privilege” as “[a] special legal right, exemption, or immunity granted to a person or class of persons, an exception to a duty,” or “[a]n evidentiary rule that gives a witness the option to not disclose the fact asked for, even though it might be relevant; the right to prevent disclosure of certain information in court, esp. when the information was originally communicated in a professional or confidential relationship” and listing the “attorney-client privilege” as an example).
10. See Upjohn Co. v. United States, 449 U.S. 383, 389 (1981) (stating that “[t]he attorney client privilege is the oldest of the privileges for confidential communications known to the common law”);
Union Carbide Corp. v. Dow Chem. Co., 619 F. Supp. 1036, 1046 (D. Del. 1985) (notingthat the attorney-client privilege “dates back to the 16th century”).
11. Postorivo v. AG Paintball Holdings, Inc., 2008 WL 343856 (Del. Ch. Feb. 7, 2008); Tekni-Plex, Inc. v. Meyner & Landis, 674 N.E.2d 663 (N.Y. 1996).12. 674 N.E.2d 663, 670 (N.Y. 1996).13. Id. at 670-71.14. Id. at 671-72 (noting that the decision was made “[i]n light of the facts of this particular transaction and the structure of the underlying agreement”).
15. 2008 WL 343856 (Del. Ch. Feb. 7, 2008).16. Id. at *2 (describing the terms of the asset purchase agreement and noting that “§ 12.8 of the [asset purchase agreement] provides that [it] is governed by New York law.”).
17. Id. at *1 (noting the parties‟ agreement).
18. Ross v. State, 990 A.2d 424, 428 (Del. 2010) (“The role of the judiciary in interpreting a statute is to determine and give effect to the legislature‟s intent. When the intent is reflected by unambiguous language in the statute, the language itself controls. In that instance, a court must apply the statutory language to the facts of the case before it.”) (internal citations omitted); Rubick v. Sec. Instrument Corp., 766 A.2d 15, 18 (Del. 2000) (“If the statute is unambiguous, there is no room for interpretation, and the plain meaning of the words controls.”); Coastal Barge Corp. v. Coastal Zone Indus. Control Bd., 492 A.2d 1242, 1246 (Del. 1985)(noting that where a statute is unambiguous, “the Court‟s role is then limited to an application of the literal meaning of the words.”).19. See Oral Arg. Tr. 112:14-18 (“The statute clearly is intended to say that the entirety of the ball of rights, everything that the law recognizes is a right [was sold], period, full stop; and you would have to be putting an asterisk on the statute to get there.”). The Buyer also points to Delaware Rule of Evidence 502, which explicitly contemplates that the attorney-client privilege may pass to a corporation‟s successor, for additional support of this interpretation, because no evidence of a carve out appears there either. See Del. R. Evid. 502(c) (“The privilege under this rule may be claimed by ... the successor, trustee or similar representative of the corporation.”).
20. See Fid. & Deposit Co. of Md. v. State Dep’t of Admin. Servs., 830 A.2d 1224, 1228-29 (Del.Ch. 2003) (refusing to “impos[e]an additional term upon the statute that was not put in place by the legislature” because “[t]he legislature was clearly capable of articulating exacting requirements” if it wanted to do so); see also State v. Cooper, 575 A.2d 1074, 1075-76 (Del. 1990) (noting that “the language of the statute must be regarded as conclusive of the General Assembly‟s intent.”).21. See Oral Arg. Tr. 71:22-72:5; Oral Arg. Tr. 72:13-15.22. See, e.g., In re Adoption of Swanson, 623 A.2d 1095, 1096-97 (Del. 1993) (“[O]ur role as judges is limited to applying the statute objectively and not revising it.”); Giuricich v. Emtrol Corp., 449 A.2d 232, 238 (Del. 1982) (“The courts may not engraft upon a statute language which has been clearly excluded therefrom by the Legislature.”).23. Def‟s. Opp‟n. Br. at *18-19 (citing Tekni-Plex to argue that this outcome “would significantly
chill attorney-client communication during the transaction” and would therefore defeat the purpose of the attorney-client privilege).
24. See, e.g., In re Adoption of Swanson, 623 A.2d 1095, 1099 (Del. 1993) (“It is beyond the province of courts to question the policy or wisdom of an otherwise valid law. Instead, each judge must take and apply the law as they find it, leaving any changes to the duly elected representatives of the people.”) (internal citations omitted); Pub. Serv. Comm’n of State of Del. v. Wilmington Suburban Water Corp., 467 A.2d 446, 451 (Del. 1983) (recognizing “the well-established principle that if an otherwise valid statute causes or leads to an inequitable result, then it is the sole province of the legislature to correct it.”); In re Vandyke’s Estate, 136 A. 147, 148 (Del. Orph. 1927) (“If the policy of the statute is wrong, the Legislature is the only place where relief against it may be obtained.”).
25. See Sussex Cnty. Dep’t of Elections v. Sussex Cnty. Republican Comm., 58 A.3d 418, 422 (Del. 2013) (“If we determine that a statute is unambiguous, we give the statutory language its plain meaning.”); see also Moore v. Chrysler Corp., 233 A.2d 53, 55 (Del. 1967) (“Words in statutes must be given their common and ordinary meanings.”).26. . Letter from Counsel for the Buyer to the Court of Chancery(Sept. 27, 2013) (enclosing excerpts from three private company transactions).
27. Postorivo, 2008 WL 343856, at *6 n.25 (“Section 1.2(h) [of the asset purchase agreement] provides that „Excluded Assets‟ from the sale include „all rights of the Sellers under this Agreement and all agreements and other documentation relating to the transactions contemplated hereby.‟”).
28. Id.at *4 n.13.
29. See Henry Sill Bryans, Business Successors and the Transpositional Attorney-Client Relationship, 64 BUS. LAW. 1039, 1046 (2009) (noting that “Tekni-Plex was a wake-up call for transactional lawyers” and concluding that “drafting against a contrary result may be prudent”); M&A Jurisprudence Subcommittee, Mergers and Acquisitions Committee, ABA Section of Business Law, Annual Survey of Judicial Developments Pertaining to Mergers and Acquisitions, 64 Bus. Law. 433, 463 (2009) (“The Postorivo decision highlights the importance of addressing attorney-client privilege ownership issues in an acquisition agreement, regardless of whether the acquisition is structured as an asset transaction, a merger, or a sale of stock.”); Russell C. Silberglied, Who Owns Privileged E-Mails in A S363 Sale Case? Is Ownership Waived When the Debtor’s Computer Servers Are Sold?, 28-Feb AM.BANKR.INST.J., 46, 77 (2009) (“While Postorivo is one of the first cases addressing who owns the privilege in these scenarios, it will not be the last. ... [C]ounsel should strongly consider addressing these points in the asset-purchase agreement. Indeed, who will retain the privilege ... should be a part of most “checklists” in negotiating an asset purchase agreement.”).
30. Commodity Futures Trading Comm’n v. Weintraub, 471 U.S. 343, 349 (1985) (emphasis added).
31. See, e.g., John T. Hundley, White Knights, Pre-Nuptial Confidences, and the Morning After: The Effect of Transaction-Related Disclosures on the Attorney-Client and Related Privileges, 5 DEPAUL BUS.L.J.59 (1993) (exploring the “tensions that can arise in the attorney-client privilege when corporate transactions occur or are contemplated” and concluding that “forethought and planning can reduce ... uncertainty and properly provide for improved protection in many instances”).
32. To do so would “create a new contract with rights, liabilities and duties to which the parties had not assented.” Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1196 (Del. 1992).
33. See Davenport Grp. v. Strategic Inv., 1995 WL 523591 (Del. Ch. Aug. 24, 1995) (“Public policy encourages courts to protect attorney client privilege.”); Hollingsworth v. Essence Comm’ns, Inc., 1977 WL 2585 (Del. Ch. July 15, 1977) (noting that “[t]he attorney-client privilege is too basic to our law to permit it to be disregarded lightly or under uncontrolled conditions”).34. The Buyer and the Seller also filed cross-motions regarding the Entry of a Protective Order. As a result of my ruling that all privileges pass to the surviving corporation in the merger as a matter of law under § 259 of the DGCL, this issue has been rendered moot, which the Seller acknowledged could occur. Thus, the Seller‟s Motion for Entry of a Protective Order is DENIED, and the Buyer‟s Motion for Entry of Proposed Amended Protective Order is GRANTED.
For this post I have passed along the comments of Richard Burt, vice chair of the corporations committee of the Business Law Section of the California Bar on a recently decided case arising under Delaware law. That case,
Delaware Court Holds Buyer in a Merger Transaction Can Access and Use Pre-Merger Communications with Seller’s Counsel
Prepared by Richard G. Burt, vice-chair of the Corporations Committee of the Business Law Section, California Bar
. . . . .
1. The California Corporations Code is similar to Delaware law on this point, though it does not specifically use the term “privilege.” Corporations Code § 1107(a) provides, in pertinent part, that “the surviving corporation shall succeed, without other transfer, to all the rights and property of each of the disappearing corporations.”
California Evidence Code § 953(d) provides that "holder of the privilege" means “A successor … or any similar representative of a … corporation … that is no longer in existence.”
So if the corporation that held the privilege was a disappearing corporation, under the Evidence Code the surviving corporation would hold the privilege.
It would seem logical that if the corporation that holds the privilege is not the disappearing corporation but is the surviving corporation, the corporation would continue to hold the privilege (and not former directors, officers, or shareholders of that corporation).
2. The California Supreme Court has interpreted the Evidence Code mean that courts are not permitted to create non-statutory privileges as a matter of judicial policy. Would it be judicially creating a privilege to allow the former directors, officers, or shareholders of a corporation the right to assert a privilege for their benefit that previously belonged exclusively to the corporation?
3. While the parties are of course free to negotiate anything they like, whether a carve-out of the attorney-client privilege will be legally effective is unclear.
4. One solution might be for lead counsel in a transaction for the acquisition of a corporation not to represent the corporation itself in the transaction but instead to represent the corporation’s management (or shareholders), with the corporation agreeing to reimburse management (or shareholders) for their legal fees. Upon closing of the acquisition, there would be no concern about the corporation waiving the attorney-client privilege for communications between counsel and the corporation’s management (or shareholders), for the corporation would not be a party to the attorney-client relationship.
Other discussion from the practicing bar may be accessed as follows:
(1) "Following a Merger, Who Gets To Claim the Attorney-Client Privilege as To Pre-Merger Communications?" (Fox & Rothschild);
(2) "Delaware Chancery Court: Attorney-Client Privilege Passes to Surviving Corporation" (Daniel Fisher | Akin Gump Strauss Hauer & Feld LLP);
(3) "Delaware Court of Chancery Holds Attorney-Client Privilege for Sellers' Pre-Merger Communications Transferred to Surviving Corporation in the Merger" (Alan Howard and Nicholas O'Keefe; Crowell & Moring).