Shareholder Representative Services LLC v. RSI Holdco, LLC, C.A. No. 2018-0517-KSJM (Del. Ch. May 29, 2019) (McCormick, V.C.)
In this memorandum opinion, the Court of Chancery addressed the issue of pre-merger attorney-client privilege for the first time since its decision in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155 (Del. Ch. 2013), finding that defendant heeded well the Great Hill court’s advice to “use their contractual freedom” to successfully claw-back privilege over pre-merger communications.
Both Great Hill and Shareholder Representative involved what the Court noted is a “quite common” scenario in the context of mergers. As necessary to consummate the merger, sellers of a target company turn over its computer systems and servers to the surviving company at closing. These servers naturally contain communication pre-dating the merger, including privileged attorney-client communications relating to the merger itself.
In Great Hill, the Court found that Section 259 of the General Corporation Law of the State of Delaware (“DGCL”) controlled—meaning that the merger caused the transfer of all assets and privileges to the surviving company, including attorney-client privilege over pre-merger seller communications. Absent affirmative action by the sellers to either prevent actual possession of the communications or to negotiate for contractual protections, control over the privilege vested in the surviving company.
In September 2016, RSI Holdco, LLC (“Holdco”) acquired Radixx Solutions International, Inc. (“Radixx”), a cloud-based software company. The resulting Agreement and Plan of Merger (the “Merger Agreement”) contained a Great Hill provision, assigning and transferring “any privilege attaching as a result of [the legal representation] of Radixx” to Shareholder Representative Services LLC (the “Sellers”), the appointed representative of Radixx’s stockholders. The provision required both parties to “take the steps necessary” to ensure the privilege remained in effect and imposed an additional obligation on Holdco to neither “use [n]or rely on” any privileged communications in subsequent litigation involving the parties.
In July 2018, the Sellers filed suit in the Court of Chancery against Holdco for an unrelated breach of the Merger Agreement. In August 2018, Holdco brought counterclaims alleging, inter alia, fraudulent concealment and “other misconduct.” In support of its claims, Holdco sought “full, unfettered access” to approximately 1,200 pre-merger emails between Radixx and its merger counsel, which had been uncovered in post-closing litigation. The Sellers objected, and the parties filed cross-motions for disposition of privilege.
Holdco argued that privilege over the emails had been effectively waived because no attempt was made to excise the communications from the servers when they were turned over to Holdco. Holdco contended the Sellers thus failed to “take the steps necessary” to preserve the privilege in accordance with the terms of the Merger Agreement. Because privilege over the emails had been waived, the emails were no longer privileged communications and the “no use” clause did not apply.
The Court found Holdco’s argument unconvincing, determining that the plain language of the contract expressly barred Holdco from using the emails in litigation. Even if the privilege had been waived by post-closing conduct, the “no use” clause applied to communications that were privileged at the time of closing, a fact Holdco did not dispute.
Furthermore, the Court found nothing in Great Hill or in the authorities cited by Holdco to support the waiver argument, which would seem to require a belt-and-suspenders approach to preserving privilege. The Court found this contrary to the central guidance of Great Hill, which advocated contractual protections of the very sort employed by the Sellers.
Finally, both parties were required to preserve the privilege; and if privilege had been waived, it was in part the result of Holdco’s own failure to take necessary steps—a failure that could not “now inure to [Holdco’s] benefit.” As a result, the Court enforced the contractual provision by barring Holdco’s use of the privileged emails.
The Shareholder Representative decision suggests that when a clear and unambiguous contractual provision expressly preserves attorney-client privilege over pre-merger communications, there is no additional requirement on the part of the party exercising the privilege to prevent actual possession of the communications. Rather, consistent with Great Hill, the contractual protection standing alone should be sufficient to claw-back privilege.