Anyone who has been involved in the sale or merger of a business knows that the complexities of the transaction require a meticulous inventory and specification of the assets being transferred. Almost always, the merged or purchased business includes in the transfer all of its business records; invoices, purchase orders, accounting and tax documents. But unless specifically excluded, one valuable asset that the seller would likely want to retain may be inadvertently transferred to the new company and ownership: the attorney-client privilege.
Privilege Passes to New Management
At least until the deal is done, communications between a seller or merged corporation and its attorneys are protected from disclosure by the attorney-client privilege. However, the U.S. Supreme Court has held that “when control of a corporation passes to new management, the authority to assert and waive the corporation’s attorney-client privilege passes as well.” Commodity Futures Trading Commn. v. Weintraub, 471 U.S. 343, 349 (1985). The Court went on to say that:
New managers installed as the result of a takeover, merger, loss of confidence by shareholders, or simply normal succession, may waive the attorney-client privilege with respect to communications made by former officers and directors. Displaced managers may not assert the privilege over the wishes of current managers, even as to statements that the former might have made to counsel concerning matters within the scope of their corporate duties.
Courts in Texas and Delaware have elaborated on the Supreme Court’s holding in Weintraub in applying it to specific transactions and the corporate laws of those states. As a preliminary matter, all courts appear to be in agreement with the statement made by the Texas Court of Appeals in In re: Cap Rock Electric Cooperative, Inc., 35 S.W.3d 222 (2000) that “the mere transfer of assets with no attempt to continue the pre-existing operation generally does not transfer the attorney-client relationship.”
However, when the sold or merged business will remain an ongoing enterprise, the privilege is transferred to new management. As the Court of Appeals noted in In re: Cap Rock:
[The U.S. Supreme Court’s decision in] Weintraub establishes that, where efforts are made to run the pre-existing business entity and manage its affairs, successor management stands in the shoes of prior management and controls the attorney-client privilege with respect to matter’s concerning the company’s operations.
In Mergers, Privilege Passes to Surviving Entity
When considering the privilege in the specific context of a merger, both Texas and Delaware courts have relied on their states’ respective corporations codes as well as Weintraub to conclude that the privilege passes to the surviving entity. This includes, notably, privileged communications regarding the merger negotiations themselves.
In Great Hill Equity v. Sig Growth Equity Fund, 80 A.3d 155 (2013), the Delaware Court of Chancery noted the statutory language contained in Section 259 of the Delaware General Corporation Law which provides that following a merger, “all property, rights, privileges, powers and franchises… shall be thereafter… the property of the surviving or resulting corporation.”(emphasis added). In denying prior management’s claim of privilege, the court held that the statute was unambiguous and refused “to create a judicial exception to the words ‘all… privileges’ for pre-merger attorney-client communications regarding the merger negotiations.”
Texas courts have ruled similarly. Citing Article 5.06 of the Texas Business Corporations Act provides that “in a merger, the privileges, powers, rights, and duties of the corporation are transferred to the surviving corporation…” The Cap Rock court, cited above, relied on this language in holding that this includes the attorney-client privilege.
Simple Solution: Exclude the Privileged Communications From Transferred Assets
All of this is not to say that sellers or the owners of merged entities have to helplessly stand by as their privileged laundry is left out for all of new management to see. As the Delaware court in Great Hill noted, the solution is not complicated: “…the answer to any parties worried about facing this predicament in the future is to use their contractual freedom… to exclude from the transferred assets the attorney-client communications they wish to retain on their own.”
This website has been prepared by The Finley Law Group for informational purposes only and does not, and is not intended to, constitute legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.