Protecting Attorney-Client Privileged Information in M&A Deals Lisa R. Bugni June 12, 2012 ATL01 11701154v1
Attorney-Client Privilege in M&A Deals General Rule The attorney-client privilege belongs to and remains with the corporation Thus, when there is a change in control of the corporation, the attorney-client privilege will belong to the successor corporation New management will have the power to assert and waive the attorney-client privilege 2
Privilege in Asset Sales The sale or transfer of a corporation s assets without more generally does not transfer the attorney-client privilege. The majority of recent cases look to the following standard to determine control of the privilege: Whether the attorney-client relationship transfers to the new owners of the assets turns on the practical consequences rather than the formalities of the transaction If the practical consequences result in the transfer of control of the business and the continuation of the business under new management, the authority to assert or waive the attorney-client privilege will follow as well 3
Examples Attorney-client privilege transferred to purchaser that acquired patent rights and assets of division and took on employees and managers for the division. See Parus Holdings, Inc. v. Banner & Witcoff, Ltd., 585 F. Supp. 2d 995 (N.D. Ill. 2008). Attorney-client privilege transferred to purchaser that acquired certain assets, continued to sell the same product, retained the patents, and serviced customers with contracts for the product. See Soverain Software LLC v. The Gap, Inc., 340 F. Supp. 2d 760 (E.D. Tex. 2004). 4
Transaction Communications What happens if there is litigation regarding the transaction between buyer and seller? Who controls the privilege for communications between the seller and its counsel regarding the deal? If the seller were allowed to control the privilege, it would be the equivalent of turning over to the buyer all of the privileged communications of the seller concerning the very transaction at issue. 5
Transaction Communications For this reason, courts recognize an exception to the general rule for privileged communications related to the negotiation of the deal. See Orbit One Communications, Inc. v. Numerex Corp., 255 F.R.D. 98 (S.D.N.Y. 2008); Postorivo v. AG Paintball Holdings, Inc., No. 2991-VCP, 2008 WL 343856 (Del. Ch. Feb. 7, 2008). These communications are not necessary for the buyer to continue to operate the business, and, thus, the attorney-client privilege does not transfer for these communications. 6
Practical Consequences Generally, knowing disclosure of privileged communications to a third party will waive the attorney-client privilege. M&A deals usually involve the transfer of computers and servers, which could have on them privileged communications regarding negotiation of the deal. 7
Practical Consequences Does transfer of the computer/server waive the privilege applicable to privileged negotiation communications? At least two courts have found that the privilege was waived. Kaufman v. Sungard Invest. Sys., No. 05-cv-1236, 2006 WL 1307882 (D.N.J. May 10, 2006) Current Medical Directions, LLC v. Salomone, No. 600941/06, 2010 WL 724686 (N.Y. Sup. Feb. 2, 2010) 8
Practical Consequences To preserve the privilege, an effort must be made to prevent disclosure of privileged communications to the buyer. In Society of Professional Engineers v. The Boeing Co., No. 05-1251- MLB, 2010 WL 3083536 (D. Kan. Aug. 5, 2010), the court held Boeing waived its right to assert privilege over communications that remained on a server to which the buyer of a Boeing division had access. The court did not have any evidence before it that Boeing had taken steps to identify and isolate privileged communications to prevent their disclosure to the buyer. One court held the removal of privileged communications does not necessarily need to be done upon transfer of title it is sufficient to remove the privileged documents from the computer system after closing so long as removal is done prior to the time the purchaser has ready access to the computer system. See Orbit One, 255 F.R.D. 98. 9
Contractual Provisions The parties may provide for control of the attorney-client privilege in the asset purchase agreement/stock purchase agreement. This is a good practice especially where the seller retains a portion of the assets or liabilities. The Delaware Chancery Court upheld a contractual provision regarding the attorney-client privilege for excluded assets and liabilities. See Postorivo, 2008 WL 343856. But see Zenith Electronics Corp. v. WH-TV Broadcasting Corp., No. 01 C 4366, 2003 WL 21911066 (N.D. Ill. Aug. 7, 2003), where the court held that the attorney-client privilege is not a corporate asset that may be sold in an asset purchase agreement. 10
Questions? 11