Precluding Pre-Merger Communications in Post-Merger Dispute

The Harvard Law School Forum on Corporate Governance and Financial Regulation 2019-06-12

Posted by John Mark Zeberkiewicz and Daniel E. Kaprow, Richards, Layton & Finger, P.A. , on Wednesday, June 12, 2019
Editor's Note: John Mark Zeberkiewicz is director and Daniel E. Kaprow is an associate at Richards, Layton & Finger, P.A. This post is based on a Richards Layton memorandum by Messrs. Zeberkiewicz, Kaprow, Rudolf Koch and Robert Greco, and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Allocating Risk Through Contract: Evidence from M&A and Policy Implications (discussed on the Forum here); and M&A Contracts: Purposes, Types, Regulation, and Patterns of Practice, both by John C. Coates, IV.

In Shareholder Representative Services LLC v. RSI Holdco, LLC, C.A. No. 2018-0517-KSJM (Del. Ch. May 29, 2019), the Delaware Court of Chancery upheld a provision in a private-company merger agreement precluding a buyer from using the seller’s privileged emails against the seller in post-closing litigation. Following the guidance from the decision in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155 (Del. Ch. 2013), the RSI Court held that under the terms of the parties’ merger agreement, pre-merger communications between the target company’s owners and representatives and the target company’s counsel could not be used by the buyer in a post-closing dispute.

In September 2016, RSI Holdco, LLC (“Buyer”) acquired Radixx Solutions International, Inc. (“Radixx”). Radixx and its counsel negotiated for a so-called “Great Hill provision” in the merger agreement—i.e., one providing that certain pre-merger privileged communications would not pass to the Buyer at the effective time. In essence, the merger agreement provided that the pre-merger privileged communications between the sellers and company counsel would survive the merger and be assigned to the stockholders’ representative, and prevented the Buyer from using or relying on any such privileged communications. Despite the clear language of the merger agreement, the Buyer sought to use approximately 1,200 pre-merger emails that it had acquired by virtue of the merger in post-closing litigation. Although it acknowledged that the emails were presumably privileged at the time they were made, the Buyer argued that because the sellers did not take steps to excise or segregate the privileged communications from the email servers, the privilege had been waived.