Attorneys should keep in mind the importance of preserving the attorney-client privilege during the course of a merger or acquisition and understand (and cause the client to understand) which communications regarding the transaction are protected by the attorney-client privilege and what actions may waive the privilege. To the extent feasible, attorneys may also wish to discuss with the client which party will control the attorney-client privilege post-merger. Specifically, if the client is the seller (or a controlling shareholder), depending on the jurisdiction governing the merger agreement, specific steps may need to be taken to ensure that the client will continue to control premerger attorney-client privileged communications, and that the privilege does not pass to the surviving entity (and, therefore, to the acquirer).
Who Controls the Attorney-Client Privilege Once the Merger Has Closed
As a general rule, a corporation’s management retains the right to waive the attorney-client privilege regarding certain communications made to counsel and relating to the corporation’s business. The U.S. Supreme Court has held that post-merger transfer of the attorney-client privilege depends on the “practical consequences” of the merger, and not on the “formalities of the particular transaction.” These “practical consequences” rest on whether the merger results in a change of control of the target corporation. If it does, privilege passes to the surviving corporation with the new management holding the right to assert or waive privilege. This is to ensure that the management of the surviving corporation has all the information necessary to continue the operations of the corporation and properly defend any claims against it.
However, transfer of the attorney-client privilege is not always clear. Post-merger litigation regarding the acquisition transaction is common, and oftentimes the surviving corporation may request access to (or be entitled to receive under the terms of the transportation documents) privileged preclosing communications between the seller (or a former controlling shareholder) and its attorneys relating to the merger or its negotiation. The answer to the question of who controls preclosing, privileged communications relating to the transaction when the surviving corporation demands access to such communication post-closing depends on the jurisdiction. The two leading jurisdictions are New York and Delaware, with most other states following the rule established by one of these jurisdictions.
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