More Private M&A Deals Addressing Attorney-Client Privilege

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By Michael Greene

Aug. 15 — More and more deal documents relating to the acquisition of private companies are including attorney-client privilege assignment clauses, attorneys told Bloomberg BNA.

These relatively new clauses seek to assign the attorney-client privilege relating to deal negotiations to shareholders of the target companies or their representatives. The provisions are important to ensure that the shareholders retain their right to privileged communications after the deal closes.

It isn't so much of an issue when public companies are acquired because their shareholders are unlikely to be sued over the purchase.

Dramatic Impact

Disclosure of the communications occurring during the deal “can obviously have a dramatic impact on post-closing indemnification claims and other post-closing disputes” between the buyer and the seller, Jonathan Corsico, a Washington-based partner at Gibson, Dunn & Crutcher LLP, told Bloomberg BNA in an e-mail.

Parties that fail to resolve this issue in their merger agreements can end up with “counter-intuitive results,” he said.

However, while a growing number of private-company deals are including such provisions, there appears to be no consensus as to how they should be drafted, according to a recent white paper by SRS Acquiom, which provides services for shareholders in private merger and acquisition deals.

Johnson & Johnson, Sysco Purchases

As of Aug. 15, buyers this year have completed at least 155 acquisitions of private companies valued at over $500 million, according to data compiled through Bloomberg Law: Corporate Transactions’ Deal Analytics. These include deals of more than $1 billion dollars, including Johnson & Johnson's acquisition of Vogue International for $3.3 billion, and Sysco Corp.'s acquisition of Brake Bros. Ltd for $3.1 billion.

This indicates that the need to address the post-closing status of the target’s attorney-client privilege is not just a problem for private equity funds and smaller acquirers, but is playing a role in the negotiation of major transactions.

Sellers of private companies started to push for attorney-client privilege assignment provisions in deal documents after a 2013 Delaware Chancery Court ruling— Great Hill Equity Partners IV LP v. SIG Growth Equity Fund I LLP, 2013 BL 316872.

In that decision, the court held that absent a contractual provision that states otherwise, the privilege over the seller's pre-merger communications, including those related to the deal negotiations, are transferred to the surviving corporation.

SRS Acquiom, which analyzed over 50 transactions that closed after the Great Hill decision, found that two-thirds of the merger agreements included attorney-client privilege provisions.

Industry Standard?

These provisions are becoming standard, said Scott Freeman, a New York-based partner at Sidley Austin LLP and co-leader of the firm’s M&A and private equity group.

While it is the responsibility of the target company's counsel to ensure they are included, the buyer's attorneys are unlikely to fight such clauses, Freeman said. However, the buyer's counsel may seek to narrow the provision to ensure the privilege is retained only for deal-related advice, he said.

According to SRS Acquiom's research, agreements that addressed the privilege were divided on whether to assign it to the target company's shareholders as a group or their post-closing representatives. Thirty-nine percent assigned the right to a shareholder group, 34 percent assigned it to the shareholder group's post-closing representative, and 15 percent assigned it to the shareholder group and its representative.

The final 12 percent addressed the privilege but didn't assign it to a particular party.

Paul Koenig, co-chief executive officer of SRS Acquiom, told Bloomberg BNA that problems can arise when the privilege is assigned to the selling shareholders as a group. For one, it raises the question as to whether each shareholder has the right to waive the privilege for the entire group, he said.

Koenig also said that if the privilege is assigned to an individual, it may be better to assign the privilege to a shareholder representative or an outside investor to avoid potential conflicts of interest.

Best Practices

It is “certainly a deficiency” for a private-company acquisition agreement not to address the privilege issue, said Corsico, whose practice focuses on M&A deals. However, some agreements that address the matter do so in “language that is so confusing that it’s not clear what has actually been agreed to.”

Corsico suggested that when the parties are drafting and negotiating the provisions, they should specifically define what privileged communications are captured. Many agreements struggle with this part, he said. In addition, the parties should provide an easily understood rule as to how those privileged communications are to be handled post-closing.

The most basic construct is that all pre-closing privileged communications that relate to the transaction itself, such as negotiations between the buyer and seller, and the preparation of legal agreements for the deal, are to remain within the control of the seller before the deal closes, Corsico said.

Corsico also suggested that in less traditional situations, additional provisions may be appropriate. For example, if the seller is involved in major litigation partially involving the target company, the seller—by allowing the privilege to pass to the buyer—could end up having the buyer release privileged communications after the deal closes, which could be damaging to the litigation.

In such circumstances, the parties may want to agree that all privileged communications impinging on the lawsuit should require the consent of both the buyer and seller before it can be released, he said.

One topic that is often overlooked is how the parties should address privileged communications that inadvertently end up in the hands of the buyer, Corsico continued. He noted, for example, that it is very common that privileged e-mails are contained in the target company's servers, which become the buyer's property after the deal closes.

“But does the buyer also own those privileged e-mails?” Corsico asked. “Should the buyer be obligated to return or delete those e-mails?” A good solution to the problem may be for the seller to provide that the ownership of those e-mails remains with the seller, and that the buyer will covenant to not access those e-mails without the seller’s prior consent, he said. That, however, may be “awkward and difficult to police.”

To contact the reporter on this story: Michael Greene in Washington at mgreene@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com

For More Information

The SRS Acquiom white paper is available at https://srsacquiom.com/resources/make-great-hill-case/.

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