In most mergers, the buyer and seller are each represented by legal counsel. Many shareholders of the selling company assume that the law firm that “sat on their side of the table” in the negotiation phase of the transaction would continue to represent their interests after closing. After all, the selling shareholders were the owners of the selling company, and thus were the ones whose economic interests the selling company’s lawyers were seeking to protect in negotiating the deal. Many shareholders also assume that any communications with their counsel will remain confidential and cannot later be accessed by the buyer. Both of these issues have received substantially more attention lately in light of recent case law and increased focus on their importance to the post-closing process.
Regarding the conflicts waiver issue, whether the seller’s law firm can continue to represent the selling shareholders or the shareholder representative post-closing is not always clear. The law firm’s client is usually the selling company, not its shareholders. At closing, the company that was acquired becomes a part of the buyer, and therefore, the attorney-client relationship arguably flows to the buyer. This means that the selling company’s counsel may be conflicted out of taking a position that is contrary to the interests of the combined company, as this combined company now includes its current or former client.
To address this conflicts issue, our Tales from the M&A Trenches series recommends that the selling company consider adding language to the merger agreement that specifically says that the selling company and the buyer waive this possible conflict of interest, and agree that the seller’s law firm can represent the selling shareholders and their representative after closing. Indeed, this is becoming more common in merger agreements. The 2014 SRS Acquiom M&A Deal Terms Study reveals that the inclusion of such conflict waivers has nearly doubled in the past year:
The upswing in these provisions suggests that parties are becoming increasingly sophisticated about the growing complexity of post-closing periods, as well as the growing incidence of post-closing claims.
Recent case law has alerted deal parties to the importance of addressing the post-closing ownership of the attorney-client privilege prior to closing and the merger parties’ future access to information. In a recent court decision, Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, C.A. No. 7906-CS (Del. Ch. Nov. 15, 2013), the Delaware Chancery Court addressed the question as to whether rights to the legal privilege and the attorney-client relationship flow to the buyer with respect to pre-closing communications. The court determined that the selling company’s attorney-client privilege covering pre-closing communications transferred to the buyer following closing. The court suggested that the target company could have avoided this outcome by specifically excluding such privilege rights from being transferred to the buyer contractually in the merger agreement. While many agreements are still silent on this issue, recently we have seen some contracts with new language specifically to address post-closing ownership of the privilege and rights of access to communications and information.
These issues are complex and can have a significant impact on post-closing claims and disputes. Additionally, many related questions remain unanswered by the courts, such as who owns the privilege if not the surviving company and how should any assignment to someone else be done. Because of that, merger parties should consult with knowledgeable legal counsel to help them avoid potential post-closing surprises.
Download Tales from the M&A Trenches for more discussion and examples of conflict waivers.
View our press release for a lengthy discussion of the Great Hill Case and its implications.
Download 2017 SRS Acquiom M&A Deal Terms Study for an analysis of 500 recent transactions and insights into M&A deal terms and trends.
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