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How Does A Merger Affect An Acquired Company's Attorney-Client Privilege?

A Massachusetts Superior Court judge recently ruled that, when ABC Corporation merged with and acquired XYZ Corporation, ABC Corporation held XYZ Corporation's attorney-client privilege over pre-merger communications with counsel, even when those communications related to the merger itself. The decision is captioned Novack v. Raytheon Co., 2014 WL 7506205 (Oct. 24, 2014).

The plaintiff in Novack was the acquired company's shareholders' representative, and he was contemplating taking the depositions of the attorneys who represented the acquired company during the merger. The plaintiff's position was that he -- as the shareholders' representative -- succeeded to the acquired company's attorney-client privilege as it related to pre-merger communications about the merger. Presumably after some pushback from the defendant, the plaintiff filed a motion to clarify the holder of the attorney-client privilege relating to the negotiation of the merger agreement.

Noting that the plaintiff's motion teed up an issue never before decided in Massachusetts, the Superior Court judge relied in large part on case law from the Delaware Chancery Court.  In Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund, I, LLLP, 80 A.3d 155, 162 (Del Ch. 2013), the Chancery Court ruled, " express carve out, the privilege over all pre-merger communications -- including those relating to negotiation of the merger itself -- passed to the surviving corporation in the merger, by plain operation of clear Delaware statutory law under ยง 259 of the [Delaware General Corporation Law, or DGCL]." 

The merger agreement in Novack did not include a carve out for pre-merger attorney-client communications concerning the merger itself. Quite to the contrary, the merger agreement read, "At the Effective Time, the Merger will have the effects set forth in this Agreement and the applicable provisions of the DGCL. Without limiting the generality of the foregoing sentence, and subject thereto, from and after the Effective Time, all property, rights, privileges, immunities, powers, franchises, licenses and authority of [the acquired company] will vest in the [acquiring company], and all debts, Liabilities, restrictions and duties of [the acquired company] will become the debts, Liabilities, restrictions and duties of the [acquiring company]." Novack, at *2. 

Citing the Chancery Court's reasoning in Great Hill with approval, the Superior Court judge held that the acquired company's shareholders' representative did not hold the acquired company's attorney-client privilege, even over merger-related communications with counsel. Instead, the acquiring company held the privilege, a holding which surely thwarted the plaintiff's discovery plans.

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