Protecting a Vendor’s Privilege in M&A Sale Transactions
Canadian dealmakers should be aware of a recent decision of the Delaware Court of Chancery addressing the circumstances in which a target company’s legal privilege belongs to the purchaser after a sale transaction.
In Shareholder Representative Services LLC v RSI Holdco, LLC, CA No 2018-0517-KSJM (Del Ch May 29, 2019), the Delaware Court of Chancery grappled with a scenario commonly faced in M&A transactions:
- At closing, the target company (and its assets) are transferred to the buyer, including documents containing the target company’s privileged communications with its counsel relating to and pre-dating the sale transaction.
- The buyer now possesses the target company’s privileged communications, including those concerning merger negotiations, which it seeks to use in post-closing disputes.
RSI Holdco, LLC (the “Buyer”) and the selling shareholders (the “Sellers”) of Radixx Solutions International, Inc. (the “Target”) entered into a merger agreement with a “carve out” concerning the use of the Target’s privileged documents. The carve out stipulated that:
- “any privilege as a result of [the Target’s Counsel] representing [the Target]” in connection with the deal would survive the closing and “remain in effect”;
- such privilege would be assigned to and controlled by the Sellers’ representative;
- the Sellers and Buyer would have a positive obligation to ensure that the privilege remained in effect; and
- no party would “use or rely on any of the [privileged documents] in any action or claim against or involving any of the parties” to the deal.
The Delaware Court upheld the carve out in the merger agreement, thereby preventing the Buyer from using 1,200 privileged pre-merger emails in post-closing litigation against the Sellers.
The Court held that generally, “the privilege over all pre-merger communications—including those relating to the negotiation of the merger itself—passed to the surviving corporation in the merger.” However, the express carve out agreed to by the parties in the merger agreement qualified the general rule; the precise scenario being litigated was contemplated and addressed in the agreement.
- The holding in RSI Holdco is consistent with Canadian law. In NEP Canada ULC v MEC OP LLC, 2013 ABQB 540, the Alberta Court of Queen’s Bench reached a similar conclusion to that in Great Hill. There, Merit Energy Company LLC (“Merit”) entered into a Share Purchase and Sale Agreement (“the SPA”) with NEP Canada ULC (“NEP”) to sell MEC Operating Company ULC (“MEC”). Upon closing, NEP amalgamated with MEC and continued to carry on business. Through this transaction, NEP acquired privileged attorney-client communications between Merit’s internal legal counsel and an outside law firm, both of which acted for both Merit and MEC on the transaction. The Court held that, in the absence of any contractual agreement to the contrary, NEP was free to use these privileged materials in a post-closing dispute:
… When Merit sold MEC to NEP, they could have inserted a provision into the SPA under which any rights MEC had to exercise or waive privilege over documents relating to the SPA negotiations would terminate on closing, leaving Merit in sole possession of the privilege. They did not. On the contrary, Merit forwarded the documents to the newly amalgamated company which, despite the name change, was a continuation of the legal persona of MEC. Accordingly, Merit cannot now claim privilege over the Contested Data as against the amalgamated company. The documents in issue belong to and are producible to and by NEP in this action. (emphasis added)
- The RSI Holdco decision provides deal makers with guidance on contractual provisions that may protect the seller’s privilege in a sale transaction. Provisions similar to those in the RSI Holdco merger agreement should be negotiated to expressly carve out pre-deal privilege communications so that the vendor cannot easily rely upon them in deal litigation (or otherwise).
privilege Purchase Agreement purchaser share purchase Asset Purchases agreement of purchase and sale Delaware Delaware Court