Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, C.A. No. 7906 (Nov. 15, 2013) (Strine, C.)
In this Opinion, the Court of Chancery resolved a privilege dispute arising out of a merger transaction and relating to the ownership of pre-merger attorney-client communications. The Court concluded that, absent an express agreement to the contrary, pre-merger privileges – including the attorney-client privilege – pass to the surviving corporation in a merger by operation of statutory law under Section 259 of the General Corporation Law.
In 2011, plaintiffs acquired Plimus, Inc. (“Plimus”) pursuant to a merger in which Plimus was the surviving corporation. Plaintiffs later brought suit against the defendants, former shareholders and representatives of Plimus, alleging that the defendants fraudulently induced plaintiffs to acquire Plimus. In connection with that claim, plaintiffs notified defendants that they had discovered communications between defendants and Plimus’ legal counsel regarding the transaction. Defendants asserted the attorney-client privilege over those communications on the grounds that defendants retained control over the attorney-client privilege that belonged to Plimus with respect to such pre-merger communications, notwithstanding the fact that defendants had not taken any steps to segregate or to extricate such communications from Plimus’ computer systems.
The Court began its analysis by examining the language of Section 259 of the General Corporation Law, which states in pertinent part that “all property, rights, privileges, powers and franchises, and all and every other interest shall be thereafter as effectually the property of the surviving or resulting corporation…” Defendants argued that “all … privileges” does not include the attorney-client privilege, and as a result, defendants retained control over the same. The Court noted that neither it nor the defendants could locate legislative history or other evidence to support such interpretation. Moreover, the Court concluded that defendants’ interpretation of Section 259 was not a plausible interpretation of the plain language of the statute, finding that the only reasonable interpretation of the statute is that “all means all … and that this includes all privileges, including the attorney-client privilege.” Likewise, the Court rejected defendants’ reliance on the New York Court of Appeals decision in Tekni-Plex, Inc. v. Meyner & Landis, 674 N.E.2d 663 (N.Y. 1996), and the Court of Chancery’s decision in Postorivo v. AG Paintball Holdings, Inc., 2008 WL 343856 (Del. Ch. Feb. 7, 2008). In Tekni-Plex, the Court of Appeals decided that case without citing to Section 259. And although the Court of Chancery applied Tekni-Plex in Postorivo, the Court of Chancery did not then determine whether the New York case would be correct under Delaware law, as the Court of Chancery was applying New York law in the context of an asset purchase agreement and not a merger transaction. Finally, the Court noted that the parties could have included a provision in the merger agreement specifically excluding pre-merger attorney-client communications the defendants wished to retain, as was done in precedent transactions cited by plaintiffs. As a result, given the absence of such contractual carve-out, all of the pre-merger communications passed to the surviving corporation by operation of Section 259. In light of the foregoing, the Court granted plaintiffs’ motion to enter an amended protective order.