The issues raised by the study and how the lack of consensus resolves over time should be watched closely by all participants in merger agreements
San Francisco, CA, Aug. 4, 2016 — The latest study from industry innovator SRS Acquiom analyzes merger agreements since the November, 2013 Great Hill ruling and reveals no apparent consensus on how selling companies are assigning rights of attorney-client privilege that relate to pre-closing communications.
In the Great Hill case, the Delaware court determined that a buyer in a merger might be able to access the pre-closing communications that occurred between the seller and its attorneys unless the parties included specific language in the agreement to prevent this.
“The Great Hill case was concerning for many in M&A because most people had previously assumed that the adverse party in the merger would never be able to see the communications they had with their attorney,” said Paul Koenig, co-CEO of SRS Acquiom. “Great Hill made clear that might not be the case. Many lawyers and investors were surprised to hear that communications they thought were confidential could potentially be used against them in instances such as post-closing indemnification claims brought by a buyer alleging a breach of a representation or warranty by the seller,” Koenig added. “Our study is the first examination of how the industry is responding to Great Hill. We found no consensus, and frankly, many pros and cons of the various approaches may not be fully appreciated by all merger participants.”
The study finds that since Great Hill one-third of merger agreements continue to have no provisions addressing the privilege issue. Of the two-thirds of transactions that do include applicable language, 39% of all agreements assign the privilege to the target company shareholders as a group, 15% to the shareholder group and their post-closing representative, and one-third to the shareholder representative alone. Prior to Great Hill, very few merger agreements included any language to address the post-closing ownership of privilege issue.
The SRS Acquiom study and related white paper analyze the frequency of alternative formulations, provide examples of the language used, and discuss the advantages and disadvantages of the different approaches and possible solutions.
Citing one approach, Koenig said, “We view any language assigning the privilege to a group as problematic as it creates complexity regarding how it could later be affirmatively or accidentally waived. Agreements assigning the privilege to an individual holder, whether that is the shareholder representative, the former CEO or a lead investor, could avoid such complications.”
Available for download at srsacquiom.com, the study has important implications for all parties to M&A transactions. It discusses open issues such as: In mergers how do sellers retain the privilege? If the privilege can be transferred, how do the sellers avoid an immediate waiver? What is the scope of the communications that should be subject to any privilege retained by the sellers?
Concluded Koenig, “It is not clear which of the derivations now being used by various law firms might or might not work when tested in a future case, or whether certain formulations could create unforeseen problems such as an unintentional waiver of the privilege they thought had been assigned. We hope our findings will encourage discussion and accelerate efforts to reach industry consensus.”
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 Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, C.A. No. 7906-CS (Del. Ch. Nov. 15, 2013)