DELAWARE COURT RULES THAT PRIVILEGED COMMUNICATIONS PASS WITH MERGER

GREAT HILL EQUITY PARTNERS IV, LP V. SIG GROWTH EQUITY FUND I, LLLP, NO. 7906-CS (DEL. CH. NOV. 15, 2013).

In GREAT HILL, the plaintiffs—Great Hill Equity Partners IV, LP, and three other companies (“Buyer”)—purchased Plimus, Inc. (“Seller”) in September of 2011. One year after the sale, the Buyer filed suit against the Seller alleging that the Buyer was fraudulently induced into the transaction. At issue were pre-merger communications between the Seller and its attorney that apparently shed light on issues Plimus was having that it failed to disclose prior to the merger. The merger agreement, however, lacked a provision concerning pre-merger, attorney-client privileged communications. The Seller argued that pre-merger communications with its attorney were privileged and did not pass with the merger. The Court of Chancery disagreed. 

 In its ruling, the Court analyzed Section 259 of the Delaware General Corporation Law (“DGCL”)—dealing with mergers—which states in part, “all property, rights, privileges, power and franchises, and all and every other interest shall be thereafter as effectually the property of the surviving or resulting corporation”. The Court rejected the Seller’s narrow interpretation of what constitutes a “privilege” and looked to the plain wording of the statute. Furthermore, the Court recognized that if the Delaware legislature had intended to exclude the attorney-client privileges from merger assets, it could have easily done so in the language of the statute. 

 Also noted by the Court was the fact that parties in commerce are free to conduct transactions as they see fit—“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”. Therefore, the Court suggested that any party worried about facing a similar predicament should use their contractual freedom to exclude attorney-client communications from the transferred assets. Otherwise, absent such an express carve out, the privilege over pre-merger communications—including communications regarding the merger itself—pass to the surviving company.

While not binding in Louisiana, the Delaware law is similar to Louisiana in the sense that it does not define the scope of the “privilege” transferred during a merger. Instead, the statute provides that the surviving or new business shall possess all the rights, privileges and franchises possessed by the former business. LOUISIANA REVISED STATUTE 12:115(C). Further, subpart (D) states all property and assets of whatsoever kind or description of each of the constituent business shall be taken and deemed to be transferred to, and vested in, the surviving or new business. According to the plain wording of the statute, privileged communications would become property of the surviving or resulting corporation.

Practice Tip: When involved with a merger, consolidation or other type of business asset transfer, it is important to accurately define exactly what assets, rights, privileges and other property will be made a part of the transaction. This cautionary exercise could prevent the type of unfortunate situation that arose in GREAT HILL.