Most executives negotiating merger agreements understand that communications with their respective counsels are protected from disclosure under the privilege afforded attorney-client communications. However, not all executives understand that it is their respective companies which own the privilege rather than the individual executives. Further, unless expressly stated in the merger agreement, upon consummation of the merger, the buyer now owns and controls the privilege, allowing the buyer to access the privileged information on the merger transaction.
In 2013, the Delaware Court of Chancery confirmed this principal in Great Hill Equity Partners IV LP v. SIG Growth Equity Fund I LLLP, 80 A.3d 155 (Del. Ch. 2013). The court found that absent express language in the merger agreement excluding attorney-client communications from the transferred assets, the buyer will own the attorney-client communications post-closing.
Since that ruling, we have noticed a sharp increase in the number of merger agreements containing language retaining for the seller all pre-closing attorney-client privileged communications related to the merger transaction. In mining the data in the Forsite™ M&A Deal Tool, which includes deal points from over 500 recent M&A transactions, we found that in 2013 only 14% of merger agreements included an express retention by the seller of attorney-client communications. That rapidly climbed to 44% in 2014 and 52% in 2015.
While the buyer may argue against such a retention clause, and the seller may have reasons to not argue for retention, we nonetheless expect the frequency of such retention language to increase as this issue becomes a standard negotiation point in merger transactions.