In Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155 (Del. Ch. 2013), the Delaware Court of Chancery clarified that under Delaware law the privilege for pre-merger communications passes to the surviving company after a merger is consummated. The privilege transfer would include the privilege for pre-closing communications regarding the merger itself. The communications at issue in Great Hill were the sellers’ pre-closing communications with the target company’s outside counsel that were in buyer’s possession post-close. The Court urged merger parties to consider the need for contractual provisions that would protect against a privilege transfer should a different result be desired, the so-called privilege claw-back provision, which was absent from the Great Hill merger agreement.
Last week, in Shareholder Representative Services LLC v. RSI Holdco, LLC, C.A. No. 2018-0517-KSJM (Del. Ch. May 29, 2019), the Court upheld a privilege claw-back provision in a private-company merger transaction, consistent with its guidance in Great Hill. RSI acquired Radixx Solutions International, Inc. in 2016. A post-closing dispute arose between the parties related to purchase price adjustments and, in its efforts against the sellers, RSI sought to rely on emails of the target company that contained privileged pre-merger communications with its outside counsel. But the Court disallowed such reliance in deference to the contractually negotiated privilege claw-back provision. The RSI privilege claw-back provision not only stated that the privilege survived the merger but also assigned control of the privilege to the sellers’ stockholder representative and prohibited RSI, as the buyer, from using or relying on any privileged communications. The Court rejected RSI’s arguments of lack of post-closing privilege or that any privilege had been waived, despite assertions that sellers and Raddix had not restricted RSI’s access to the email communications or taken steps to delete or isolate the email communications from the target company’s systems or other non-privileged communications.
The RSI opinion further highlights the critical need for thoughtful language regarding the parties’ intent with respect to privileged pre-merger (or pre-sale) communications, particularly if the sellers intend to preserve authority and control over the privilege after the transaction closes (while considering buyer’s interest in materials relating to third party claims for the pre-closing period).
The Delaware Court of Chancery’s RSI opinion can be found here.
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