Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

In Great Hill Equity Partners IV v. SIG Growth Equity Fund I, Del. Ch., C.A. No. 7906-CS (Nov. 15, 2013), the Delaware Court of Chancery held that the target’s attorney-client privilege vested in the surviving corporation following the merger.  Provisions in merger agreements trying to work around the Great Hill holding are starting to appear in the EDGAR database.  We have highlighted three such provisions below.  For the most part, the provisions are similar, however, we have highlighted some of the more significant deviations.

In light of the Great Hill decision, counsel should consider the following issues when drafting these types of merger agreement provisions:

  • Specifying the asset that is being retained by the selling group (i.e., control of the attorney-client privilege);
  • Defining the scope of the communications that are being excluded and retained by the selling group (transaction related only vs. a broader set of communications);
  • Any circumstances in which it would be appropriate to allow buyer to use or control the privileged communications that are retained by the selling group vis-à-vis a third party; and
  • Any circumstances in which it would be appropriate to require the buyer to assert the attorney-client privilege against a third-party for communications that pass to the surviving corporation.

Given that buyers will often obtain access to attorney-client privileged communications of the target following the closing as a result of taking over the target’s servers, etc., below are a couple other provisions to consider adding to merger agreements when representing the selling group:

  • A covenant from the buyer and surviving corporation prohibiting them from asserting waiver of the attorney-client privilege by virtue of such disclosure of attorney-client communications; and
  • A covenant from the buyer and surviving corporation prohibiting them from using any attorney-client privileged communications in any litigation against the selling group.

Example 1

Section 9.13 Waiver of Conflicts. Recognizing that [Seller Law Firm] has acted as legal counsel to the Company, its Subsidiaries, certain of the direct and indirect holders of shares of Common Stock and certain of their respective Affiliates prior to date hereof, and that [Seller Law Firm] intends to act as legal counsel to certain of the direct and indirect holders of shares of Common Stock and their respective Affiliates (which will no longer include the Company and its Subsidiaries) after the Closing, each of Parent, Merger Sub and the Company hereby waives, on its own behalf and agrees to cause its Affiliates, the Surviving Corporation and its Subsidiaries to waive, any conflicts that may arise in connection with [Seller Law Firm] representing any direct or indirect holders of the shares of Common Stock or their Affiliates after the Closing as such representation may relate to Parent, Merger Sub, the Company, the Surviving Corporation and its Subsidiaries or the transactions contemplated by the Transaction Agreements. In addition, all communications involving attorney-client confidences between direct and indirect holders of shares of Common Stock, the Company and its Subsidiaries and their respective Affiliates, on the one hand, and [Seller Law Firm], on the other hand, relating to the negotiation, documentation and consummation of the transactions contemplated by the Transaction Agreements shall be deemed to be attorney-client confidences that belong solely to the direct and indirect holders of shares of Common Stock and their respective Affiliates (and not the Company, the Surviving Corporation or their respective Subsidiaries). Accordingly, the Surviving Corporation and its Subsidiaries shall not have access to any such communications or to the files of [Seller Law Firm] relating to such engagement from and after the Effective Time. Without limiting the generality of the foregoing, from and after the Effective Time, (a) the direct and indirect holders of shares of Common Stock and their respective Affiliates (and not the Surviving Corporation and its Subsidiaries) shall be the sole holders of the attorney-client privilege with respect to such engagement, and none of the Surviving Corporation or its Subsidiaries shall be a holder thereof, (b) to the extent that files of [Seller Law Firm] in respect of such engagement constitute property of the client, only the direct and indirect holders of shares of Common Stock and their respective Affiliates (and not the Surviving Corporation and its Subsidiaries) shall hold such property rights and (c) [Seller Law Firm] shall have no duty whatsoever to reveal or disclose any such attorney-client communications or files to the Surviving Corporation or any of its Subsidiaries by reason of any attorney-client relationship between [Seller Law Firm] and the Company or any of its Subsidiaries or otherwise. Notwithstanding the foregoing, none of the Surviving Corporation or any of its Subsidiaries is waiving any attorney-client privilege (including relating to the negotiation, documentation and consummation of the transactions contemplated by the Transaction Agreements) in connection with any third-party Litigation.

Example 2

SECTION 9.15. Waiver of Conflicts. Recognizing that [Seller Law Firm] has acted as legal counsel to the Company, the Subsidiaries, certain of the direct and indirect holders of Company Shares and certain of their respective Affiliates prior to date hereof, and that [Seller Law Firm] intends to act as legal counsel to certain of the direct and indirect holders of Company Shares and their respective Affiliates (which will no longer include the Company and the Subsidiaries) after the Closing, each of Purchaser, Merger Sub and the Company hereby waives, on its own behalf and agrees to cause its Affiliates, the Surviving Corporation and the Subsidiaries to waive, any conflicts that may arise in connection with [Seller Law Firm] representing any direct or indirect holders of the Company Shares or their Affiliates after the Closing as such representation may relate to Purchaser, Merger Sub, the Company, the Surviving Corporation or the Subsidiaries or the transactions contemplated hereby. In addition, all communications involving attorney-client confidences between direct and indirect holders of Company Shares, the Company and the Subsidiaries and their respective Affiliates, on the one hand, and [Seller Law Firm], on the other hand, in the course of the negotiation, documentation and consummation of the transactions contemplated hereby shall be deemed to be attorney-client confidences that belong solely to the direct and indirect holders of Company Shares and their respective Affiliates (and not the Company, the Surviving Corporation or the Subsidiaries). Accordingly, the Surviving Corporation and the Subsidiaries shall not have access to any such communications or to the files of [Seller Law Firm] relating to such engagement from and after the Effective Time. Without limiting the generality of the foregoing, from and after the Effective Time, (a) the direct and indirect holders of Company Shares and their respective Affiliates (and not the Surviving Corporation and the Subsidiaries) shall be the sole holders of the attorney-client privilege with respect to such engagement, and none of the Surviving Corporation or the Subsidiaries shall be a holder thereof, (b) to the extent that files of [Seller Law Firm] in respect of such engagement constitute property of the client, only the direct and indirect holders of Company Shares and their respective Affiliates (and not the Surviving Corporation and the Subsidiaries) shall hold such property rights and (c) [Seller Law Firm] shall have no duty whatsoever to reveal or disclose any such attorney-client communications or files to the Surviving Corporation or any of the Subsidiaries by reason of any attorney-client relationship between [Seller Law Firm] and the Company or any of the Subsidiaries or otherwise. This Section 9.15 will be irrevocable, and no term of this Section 9.15 may be amended, waived or modified, without the prior written consent of [Seller Law Firm].

Example 3

12.20 Waiver of Conflicts. Recognizing that _____________ (“[Seller Law Firm]”) has acted as legal counsel to certain of the Securityholders (including _________ and its Affiliates) and the Company, its Affiliates and the Group Companies prior to the Closing, and that [Seller Law Firm] intends to act as legal counsel to certain of the Securityholders (including ________ and its Affiliates) after the Closing, each of the Parent and the Surviving Company (including on behalf of the Group Companies) hereby waives, on its own behalf and agrees to cause its Affiliates to waive, any conflicts that may arise in connection with [Seller Law Firm] representing any of the Securityholders (including ________ and its Affiliates) and/or its Affiliates after the Closing as such representation may relate to the Parent, any Group Company or the transactions contemplated herein. In addition, all communications involving attorney-client confidences between any Securityholders (including ________ and its Affiliates) and its Affiliates in the course of the negotiation, documentation and consummation of the transactions contemplated hereby shall be deemed to be attorney-client confidences that belong solely to such Securityholders and their Affiliates (and not the Group Companies or the Surviving Company). Accordingly, the Group Companies and the Surviving Company shall not have access to any such communications, or to the files of [Seller Law Firm] relating to engagement, whether or not the Closing shall have occurred. Without limiting the generality of the foregoing, upon and after the Closing, (i) the applicable Securityholders and their Affiliates (and not the Group Companies or the Surviving Company) shall be the sole holders of the attorney-client privilege with respect to such engagement, and none of the Group Companies or the Surviving Company shall be a holder thereof, (ii) to the extent that files of [Seller Law Firm] in respect of such engagement constitute property of the client, only the applicable Securityholders and their Affiliates (and not the Group Companies or the Surviving Company) shall hold such property rights and (iii) [Seller Law Firm] shall have no duty whatsoever to reveal or disclose any such attorney-client communications or files to any of the Group Companies or the Surviving Company by reason of any attorney-client relationship between [Seller Law Firm] and any of the Group Companies or otherwise. Notwithstanding the foregoing, in the event that a dispute arises between the Parent, the Surviving Company or any of the Group Companies and a third party (other than a party to this Agreement or any of their respective Affiliates) after the Closing, the Surviving Company (including on behalf of the Group Companies) may asset [Sic] the attorney-client privilege to prevent disclosure of confidential communications by [Seller Law Firm] to such third party; provided, however, that neither the Surviving Company nor any of the Group Companies may waive such privilege without the prior written consent of the Representative, on behalf of the Securityholders.

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