By Matthew C. Meiners

In Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, the Delaware Court of Chancery held that in a merger under Delaware law, privilege over the absorbed corporation’s communications with its counsel, including those relating to acquisition by the surviving corporation, pass to the surviving corporation.

The case arose from a suit filed by Great Hill Equity Partners IV, LP, et al. (the “Buyer”), alleging that former shareholders and representatives of Plimus, Inc. (the “Seller”) fraudulently induced the Buyer to acquire Plimus, Inc. (“Plimus”). Plimus was the surviving corporation in the merger.

After the Buyer brought the suit, a full year after the merger, it notified the Seller that, among the files on the Plimus computer systems that the Buyer acquired in the merger, it had discovered certain communications between the Seller and Plimus’s then-legal counsel regarding the transaction. During that year, the Seller had done nothing to get these computer records back, and there was no evidence that the Seller took any steps to segregate these communications before the merger or excise them from the Plimus computer systems. Additionally, the merger agreement lacked any provision excluding pre-merger attorney-client communications from the assets of Plimus that were transferred to the Buyer. Nonetheless, the Seller asserted the attorney-client privilege over those communications on the ground that it, and not the surviving corporation, retained control of the attorney-client privilege that belonged to Plimus for communications regarding the negotiation of the merger agreement.

The Buyer filed a motion with the Delaware Court of Chancery, seeking to resolve this privilege dispute and determine, among other things, that the surviving corporation owns and controls any pre-merger privilege of Plimus.

The court explained that the question is an issue of statutory interpretation of Section 259 of the Delaware General Corporation Law (“DGCL”), which provides that following a merger, “all property, rights, privileges, powers and franchises, and all and every other interest shall be thereafter as effectually the property of the surviving or resulting corporation….” The Seller contended that the statutory term “all … privileges” does not include the attorney-client privilege; however, the Seller was not able to cite any legislative history supporting this interpretation, and the court was not able to find any evidence for this interpretation in the leading treatises. The court also explained that the Seller’s reading is not a plausible interpretation of the plain statutory language, and the only reasonable interpretation of the statute is that all means all as to the enumerated categories, which includes all privileges, including the attorney-client privilege. The court reasoned that if the General Assembly had intended to exclude the attorney-client privilege, it could easily have said so. Instead, the statute uses the broadest possible language to set a clear and unambiguous default rule: all privileges of the constituent corporations pass to the surviving corporation in a merger. The Seller claimed that giving effect to § 259 of the DGCL will create serious public policy issues, but the court explained that when the General Assembly has addressed an issue within its authority with clarity, there is no policy gap for the court to fill.

The court noted that parties in commerce can, and have, negotiated special contractual agreements to protect themselves and prevent certain aspects of the privilege from transferring to the surviving corporation in the merger. The court suggested that parties use their contractual freedom to exclude from the transferred assets the attorney-client communications they wish to retain as their own. Absent such an express carve out, the court explained, the privilege over all pre-merger communications, including those relating to the negotiation of the merger itself, pass to the surviving corporation in the merger, by plain operation of clear Delaware statutory law under § 259 of the DGCL.