Delaware Court Of Chancery Holds Merger Agreement Preserved Sellers’ Ability To Assert Privilege Over Pre-Merger Attorney-Client Communications, Notwithstanding The Transfer Of Those Communications To The Buyer
On May 29, 2019, Vice Chancellor Kathaleen S. McCormick of the Delaware Court of Chancery ruled that plaintiff Shareholder Representative Services LLC (“Shareholder Representative”) as the designated representative of Radixx Solutions International, Inc.’s (“Radixx”) selling stockholders, retained the ability to assert privilege over Radixx’s pre-merger attorney-client communications in a post-closing litigation against the acquiring company, RSI Holdco, LLC (“Holdco”). Shareholder Representative Services LLC v. RSI Holdco, LLC, C.A. No. 2018-0517-KSJM (Del. Ch. May 29, 2019). Specifically, the Court held that by its plain terms the merger agreement between the parties preserved the privilege, even though the communications were physically transferred to the buyer at closing. Therefore, the Court granted plaintiff’s request for a protective order and barred Holdco from using or relying on any of Radixx’s pre-merger attorney-client communications.
Plaintiff commenced the action approximately two years after the acquisition of Radixx by Holdco, through which Holdco obtained possession of approximately 1,200 pre-merger emails between Radixx and its counsel that had been stored on Radixx’s computers and email servers. In the underlying lawsuit, plaintiff alleges that Holdco and its affiliates breached the merger agreement by failing to repay amounts withheld from the purchase price and Holdco is asserting certain counterclaims. Holdco sought to use the emails in the litigation, while plaintiff moved for a protective order.
The merger agreement provided that (1) Radixx’s privilege would “survive” the closing of the deal; (2) the privilege is assigned to and controlled by Shareholder Representative; (3) the parties agreed to take steps to ensure the privilege remained in effect; and (4) Holdco was precluded from using or relying on privileged communications in any action involving the parties after the closing. The Court found that even though all assets of a target company—including privileges—would otherwise pass to the acquirer by operation of law, “[i]n this case, the sellers used their contractual freedom to secure a provision in the merger agreement, which preserved their ability to assert privilege over pre-merger attorney-client communications.”