M & A - Attorney-Client Privilege Carveouts

In its late 2013 ruling that the attorney-client privilege passes in a Delaware law merger from the acquired corporation to the surviving corporation, the Great Hill court noted that concerned parties "can" always contractually carve out pre-merger attorney-client privileged communications from assets transferred to the surviving corporation. e.g., "all communications between sellers' or target's counsel, on one hand, and sellers and target, on the other, regarding the negotiation, documentation, and consummation of the transaction will be deemed to be attorney-client privileged, and post-closing will be owned by and controlled by the sellers."

On the buyer's side, however, if, after closing, the buyer stumbles on to the smoking gun e-mail conclusively proving that the sellers defrauded the buyer, who wants to be the lawyer on the buyer's legal team who tells the buyer's general counsel that the buyer cannot use that e-mail because it's a privileged communication that we happened to give away simply because everyone was doing it per the Great Hill case? Why should buyer give away an important asset that it paid money for and that Delaware law says buyers get by default? (The default rule being different in New York, though.) If the sellers are so concerned about being able to communicate fully, frankly, and freely with their counsel, then maybe the sellers should have engaged separate counsel rather than allowing the more common arrangement where the sellers' counsel acts both for the target and the selling stockholders.

Three key issues to think about from the buyer's end facing a hotly pursued target:

One, what communications are covered? Only communications related to the deal, i.e. deal communications, or any and all communications between the client and its counsel?

Second, who controls the privilege, for example, when litigating third-party claims or responding to government subpoenas?

And third, who has access to the privileged communications - the buyer only or do you want a common interest agreement with equal rights and access subject to some restrictions against the parties' use of the privileged communications against each other? You can even try a "my server/your server" approach, where seller keeps all the communications on seller's and its counsel's servers, while buyer keeps all communications on target servers.

In reality, though, in most cases it's going to be very hard to unpack what privilege belongs to the target company and what privilege belongs to the sellers. For example, all the data that goes into defining the reps and the disclosure schedules will be coming from the target company.