Attorney-Client Privilege: What You Need to Know Post-Deal

Transcription

1 Attorney-Client Privilege: What You Need to Know Post-Deal Dustin Kitson Greg Ramos Chris Mosley

2 Summary Transfer Of The Privilege Generally The Privilege As Applied To Merger Negotiations Practical Application

3 Issue Merger And Asset Purchase Transactions Involve Numerous Documents Many Documents Contain Privileged Communications Ordinary Business Transactions Ongoing Litigation Excluded Assets/Liabilities Negotiation Of The Transaction

4 What Happens To The Privilege Does Buyer Take The Privilege? Does Seller Keep The Privilege? Do The Parties Split The Privilege? What About Multiple Parties To The Transaction?

5 Where Issue May Arise Litigation Between The Parties Fraudulent Inducement/Misrepresentation Breach Of Representations & Warranties Litigation Involving Third Parties Efforts To Obtain Privileged Materials

6 Postorivo Postorivo v. AG Paintball Holdings, Inc., C.A. Nos VCP, 3111-VCP (Del. Ch. Feb. 7, 2008) National Paintball Supply, Inc. Sold equipment and supplies to the paintball gaming industry Owned by Eugenio Postorivo

7 Asset Purchase Agreement Postorivo sold substantially all assets to AJ Intermediate Holdings, Inc. ( AJI ) APA contained a standard acquisition provision Asset definition included all privileges Certain liabilities, including litigation, were excluded

8 Litigation/Discovery Dispute Lawsuit 1 AJI sued Postorivo for contractual indemnity Lawsuit 2 Postorivo sued AJI for fraud, waste, breach of fiduciary duty, and others claims Court consolidated the two lawsuits Which entity held the attorney-client privilege to various documents or communications Operation of NPS (pre-/post-closing) Negotiation Of APA Excluded assets/liabilities (including Procaps Litigation)

9 Operation Of NPS - Rule Focus: Documents/communications regarding the normal business operation of NPS (both pre- and post-closing) Key Issue Whether business will continue postacquisition If the successor entity intends to continue the operations of the business, the privilege transfers If the successor does not continue the business, the attorney-client privilege generally does not transfer Relies on Tekni-Plex, Inc. v. Meyner & Landis, 674 N.E.2d 663 (N.Y. 1996)

10 Business Operations Rule makes general sense If business continues, successor needs access to information related to business If business does not continue, successor s need for information is far less

11 Express Or Implied Transfer Express Agreement provides for transfer of privilege Implied Court did not rely on APA provision to consider transfer of privilege Court relied on practical application theory an implied theory

12 Negotiation of APA Rule The privilege does not transfer with respect to communications concerning the acquisition During the negotiations, the predecessor company and successor company are in an adversarial relationship The rights pursued by the successor company arise from the transaction documents not the normal business operations of the company

13 Express Or Implied Transfer Express Court stated APA contains no provision transferring Seller s privileged communications regarding negotiation of APA Problem Agreement applies to all privileges held by Seller in connection with business Appears to be an implied privilege

14 Application Privilege did not transfer Both parties agreed Compare Great Hill Equity Partners

15 Procaps Litigation Buyer s Argument: The corporation s attorney-client privilege passes as a whole to the entity that acquired substantially all of the assets (blanket rule) Rule Court enforces APA provisions

16 Procaps Litigation The court focused on the practical consequences of transferring the privilege Practical consequences favor Postorivo (Seller) NPS would have to prosecute the Procaps litigation without the ability to assert or waive the attorneyclient privilege This could be particularly problematic if Buyer had interest adverse to NPS

17 Express Or Implied Transfer Express Transfer The Agreement expressly reserved to Postorivo the privilege as to the excluded assets Implied Transfer Court focused on practical consequences Why? Note: There was little more Postorivo could do

18 Great Hill Equity Partners SIG growth equity fund was a shareholder in Plimus, Inc. Great Hill Equity Partners acquired Plimus, Inc. from SIG Growth Equity Fund in September 2011 Plimus was the surviving corporation and the merger Plimus computer system was included in the assets acquired by Great Hill Equity

19 Attorney-Client Communications Regarding The Negotiations Plimus was represented by Perkins Coie during the transaction Great Hill Equity and Perkins Coie had various written communications during the course of negotiations Those communications were maintained on Plimus computer systems

20 Litigation September Great Hill Equity brought suit against SIG for fraudulent inducement Great Hill Equity discovers communications between Great Hill Equity and Perkins Coie; notifies SIG SIG asserts it retained control of the attorney-client privilege regarding communications addressing merger negotiations

21 DGCL Section 259 Court determined Delaware law applies DGCL Section 259 All privileges shall be the property of the surviving corporation All privileges includes the attorney-client privilege Therefore, the attorney-client privilege passes as a matter of law

22 Postorivo Negotiations Exception SIG Argument SIG retains control over communications regarding the merger negotiations (relying on Postorivo and Tekni-Plex) Court Rejected This Argument

23 Tekni-Plex Distinguished The New York Court of Appeals did not apply DGCL Section 259 The Court of Appeals reached its decision based on policy reasons The Court refused to invent a judicially-created exception to the plain words

24 Postorivo Distinguished Did not cite Section 259 of the DGCL (applied New York law) The parties expressly excluded the privilege from the acquisition Result Great Hill Equity Partners entitled to privileged communications regarding merger negotiations

25 Contractually Reserving Privilege Parties can except out contractually certain aspects of the privilege from transferring Thus, the answer to any parties worried about facing this predicament in the future is to use their contractual freedom in the manner shown in prior deals to exclude from the transferred assets the attorney-client communications they wish to retain as their own. 80 A.3d at 161.

26 Failure To Protect Privilege Pre-Merger SIG Took no steps to segregate the communications with Perkins Coie before the merger SIG took no steps to excise those communications from the Plimus computer systems Merger Agreement Contained no provisions excluding premerger attorney-client communications from the assets transferred Post-Merger Took no steps to get the computer records back

27 Failure To Protect Privilege Court consciously chose not to base its decision on SIG s failure to protect the privilege (instead relying on Section 259) Court clearly concerned with SIG s failure Substantial issue as to whether SIG had waived the privilege

28 Split Of Authority Both courts agree the privilege generally passes as a matter of law Both courts agree parties can expressly reserve all or part of the privilege to the Seller

29 Split Of Authority The courts split as to whether privilege communications regarding negotiations transfer as a matter of law Postorivo/Tekni-Plex No given the adverse positions of the parties Great Hill Equity Partners Yes pursuant to the merger statute

30 Implications For Litigation Buyer v Seller Fraud/Misrepresentation Breach Of Reps/Warranties Buyer can use Seller s privileged communications to establish Seller s liabilities Third Party Claims Against Seller Privilege may sit with Buyer Buyer may choose to waive privilege

31 Other Implications Reputational? Other?

32 Panel Discussion Practical Applications Take appropriate steps to protect the privilege Pre-Closing Merger/APA Agreement Post-Closing

33 Pre-Closing Consider engaging separate counsel to represent interest of parent and subsidiary during negotiations Parents privileged communications with its counsel will not transfer upon closing Communications between parent and subsidiary may transfer at closing

34 Pre-Closing Protect the privilege Segregate privileged material from electronic and hardcopy documents Delete or excise privilege material prior to closing Document efforts to segregate/delete/excise privilege material

35 Merger/APA Agreement Address transferability of attorney-client communications in operative agreement Include inadvertent production provision Require Buyer to return inadvertently produce privilege material Preclude Buyer from using inadvertently produce privilege material in any manner

36 Post-Merger (Seller) Advise Buyer immediately upon discovering disclosure of privileged material Promptly demand return of privilege material

37 Post-Merger (Buyer) Scenario: Discovering Seller s privileged communications If handling of privileged material not addressed in operative agreement, research applicable law regarding obligation to notify/return privileged documents Comply with the notice provisions if waiver issue addressed in merger agreement

38 Attorney-Client Privilege: What You Need to Know Post-Deal Dustin Kitson Greg Ramos Chris Mosley