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S'holder Representative Servs. LLC v. RSI Holdco, LLC

Court of Chancery of Delaware

February 21, 2019, Submitted; May 29, 2019, Decided

C.A. No. 2018-0517-KSJM




The following scenario is quite common: In merger negotiations, the target company and the buyer retain their own attorneys. At closing, the target company and all of its assets transfer to the buyer by way of the surviving company. That transfer involves the transfer of computer systems and email servers, which contain pre-merger communications between the target company's owners and representatives (i.e., the sellers) and the target company's counsel. Thus, in a post-closing dispute between the sellers and buyer, the buyer possesses the target company's privileged [*2]  pre-merger attorney-client communications, including those concerning merger negotiations.

This common scenario gives rise to the question currently before the Court: When may a buyer use the acquired company's privileged pre-merger attorney-client communications in post-closing litigation against the sellers?

The Court of Chancery previously addressed this issue in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP.1 The Court held that by operation of Section 259 of the Delaware General Corporation Law (the "DGCL"), all assets of a target company, including privileges over attorney-client communications, transfer to the surviving company unless the sellers take affirmative action to prevent transfer of those privileges.2 In Great Hill, the sellers did not retain their ability to assert privilege over the pre-merger attorney-client communications because they neither negotiated for language in the merger agreement preserving the right to assert privilege over the communications nor prevented the surviving company from taking actual possession of the communications. Thus, the Court held that the sellers waived their ability to assert privilege. The Court further advised that in the [*3]  future sellers should "use their contractual freedom" to avoid waiver.3

In this case, the sellers used their contractual freedom to secure a provision in the merger agreement, which preserved their ability to assert privilege over pre-merger attorney-client communications. That provision also prevented the buyer from using or relying on those privileged communications in post-closing litigation against the sellers. Yet, the buyer argues that these contractual protections are insufficient. Because the sellers did not excise or segregate the privileged communications from the computers and email servers transferred to the surviving company, the buyer contends that the sellers waived privilege, and that the buyer may thus use the communications in this litigation.

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2019 Del. Ch. LEXIS 196 *; 2019 WL 2290916

SHAREHOLDER REPRESENTATIVE SERVICES LLC, as representative of the stockholders and optionholders of Radixx Solutions International, Inc., Plaintiff/Counterclaim Defendant, v. RSI HOLDCO, LLC and TA XII-A, L.P., Defendants/Counterclaim Plaintiffs.RSI HOLDCO, LLC and TA XII-A, L.P., Third-Party Plaintiffs, v. RONALD J. PERI, JAMES L. JOHNSTON, THOMAS R. ANDERSON, DENIS P. COLEMAN, and JUDI LOGAN, Third-Party Defendants.


Prior History: S'holder Representative Servs. LLC v. RSI Holdco, LLC, 2019 Del. Ch. LEXIS 182 (Del. Ch., May 22, 2019)


sellers, communications, Emails, buyer, merger agreement, pre-merger, privileges, surviving, merger, privileged communication, attorney-client, post-closing, contractual, negotiated, parties, assigned, target, waived, steps

Evidence, Privileges, Attorney-Client Privilege, Scope, Mergers & Acquisitions Law, Liabilities & Rights of Successors, Mergers, Contracts Law, Contract Interpretation