In the realm of M&A transactions, sellers often assume that communications with counsel pre-closing will remain confidential and unavailable to buyers in the event of post-closing disputes. However, this assumption is incorrect. The attorney-client privilege is designed to ensure clients receive accurate legal advice by encouraging full disclosure to their lawyers without fear of information being revealed to others. Buyers argue that the seller-buyer relationship often involves the selling company as the client, not its shareholders or members, making the discourse between the seller and its attorney potentially accessible to the buyer post-closing. This accessibility could negatively impact the seller's relationship with its new owner.
1. Understanding Default Rules and Negotiating Privileges
Asset Purchase Transactions:
In asset purchase transactions, sellers must recognize the default rule granting them privilege over pre-closing deal communications.[1] This means that sensitive discussions and legal advice leading up to the transaction are safeguarded. However, sellers need to be vigilant, ensuring that this privilege is clearly defined in the purchase agreement. By explicitly outlining the scope of confidentiality, sellers can prevent misunderstandings and potential breaches of privilege. Negotiating parties should leverage this default rule as a starting point, allowing them the flexibility to tailor the privilege to their specific needs. Legal advisors play a crucial role in ensuring that the negotiation process comprehensively covers the extent and limitations of the privilege, protecting sellers from unwarranted disclosures after the deal concludes.
Mergers:
In mergers, the default rule dictates that the surviving corporation gains privilege over the target’s pre-closing communications.[2] For sellers, this shift in privilege ownership necessitates careful consideration. Sellers should be aware that their pre-closing discussions with legal counsel may be accessible to the new entity. This awareness underscores the importance of strategic negotiations during the merger process. Parties should engage in comprehensive discussions to define the boundaries of privilege, allowing sellers to retain essential confidentiality over specific communications. Skilled legal counsel can assist in structuring these negotiations effectively, ensuring that sellers have a clear understanding of what information might be accessible to the surviving corporation post-closing.
Negotiating Privileges:
The negotiation of attorney-client privilege within M&A transactions is a critical component of the deal-making process. Recognizing that default rules are not one-size-fits-all, parties have the opportunity to tailor privileges according to their unique requirements. Sellers and buyers alike can negotiate explicit clauses in the purchase agreement, delineating the boundaries of privilege. Clarity in these negotiations is key. Legal experts, well-versed in the intricacies of M&A law, can guide parties in crafting precise language that protects sellers’ sensitive information while providing buyers with the necessary access for due diligence. Negotiating parties should approach these discussions with a collaborative mindset, aiming for a mutually beneficial agreement that respects both parties’ interests and confidentiality concerns.
Incorporating these considerations into the negotiation process ensures that sellers are equipped with the knowledge and legal protection needed to safeguard their privileged communications during M&A transactions. By understanding and effectively negotiating default rules and privileges, sellers can navigate the complexities of the deal-making process with confidence and clarity.
2. Mitigating Risks in Post-Closing Disputes
Upon assuming ownership, buyers might uncover undisclosed legacy liabilities or risks, leading to disputes. If buyers can prove the target’s prior knowledge of these liabilities, they may assert claims like fraud, enabling them to bypass liability limitations such as escrows, baskets, and caps.
Inclusion in Purchase Agreement:
Including a provision in the purchase agreement that explicitly safeguards privilege is a foundational step in mitigating risks associated with post-closing disputes. Sellers should work closely with legal experts to craft precise language outlining the confidentiality of attorney-client communications. By clearly stipulating that privilege related to discussions with legal counsel remains intact, sellers create a strong legal barrier against potential challenges. This proactive approach not only deters unwarranted access but also establishes a clear legal framework for addressing disputes related to privilege, providing sellers with a robust defense in case of disagreements.
Prudent Communication Practices:
Beyond legal documentation, sellers can take practical steps to minimize risks by implementing prudent communication practices. Establishing a designated personal email account for all transaction-related communications serves as a preventive measure against unintentional disclosures. Sellers should educate their team members about the importance of using secure communication channels and exercising caution when discussing sensitive matters. By fostering a culture of confidentiality and awareness, sellers reduce the likelihood of inadvertent disclosures, bolstering their position in post-closing disputes.
Common-Interest Doctrine:
In jurisdictions where the common-interest doctrine applies, parties should proactively consider its implications. By entering into common-interest agreements referencing pending or anticipated litigation, sellers can protect privileged communications made in furtherance of their shared legal interests. This strategic approach strengthens the confidentiality of discussions, making it challenging for adversaries to pierce the privilege veil. Legal advisors play a pivotal role in structuring these agreements, ensuring that they align with the specific context of the M&A transaction and the parties involved, thereby enhancing the overall protection of sensitive information.
3. Practice Tips
Negotiation Strategy:
Parties engaged in negotiations should not only be mindful of privilege ownership but also leverage their understanding of the distinct rules governing asset purchases and mergers to their advantage. By tailoring their negotiation strategies according to these rules, parties can create agreements that protect their privileged communications effectively. Being cognizant of these nuances enables negotiators to preemptively address potential disputes, fostering a smoother negotiation process.
Legal Counsel Awareness:
Legal counsel plays a pivotal role in safeguarding their clients' privileges. Being well-versed in relevant legal precedents empowers lawyers to navigate complexities confidently. By staying updated with the latest legal developments, attorneys can provide informed guidance to their clients, ensuring that privilege-related clauses in agreements are robust and comprehensive. This knowledge equips legal advisors to proactively anticipate challenges, thereby enhancing the overall protection of their clients' privileged communications.
Negotiating Privileges:
Parties involved in M&A transactions possess the freedom to negotiate and establish privileges tailored to their unique circumstances. Recognizing this freedom, parties should engage in comprehensive discussions to align privileges with their specific needs and concerns. By customizing privilege clauses in agreements, parties can address potential vulnerabilities, fortifying their positions against disputes. This tailored approach not only enhances confidentiality but also strengthens the legal foundation of the agreement, reducing the risk of privilege-related conflicts.
Email Account Transfers:
When sellers transfer email accounts to buyers post-closing, meticulous attention to detail is crucial. Sellers should not only cleanse these accounts of privileged communications but also document this process comprehensively. Keeping a record of the cleansing procedure provides sellers with a valuable defense in case of disputes, demonstrating their commitment to maintaining confidentiality. Establishing dedicated accounts solely for the sale process ensures a clear demarcation between transaction-related communications and regular business emails, minimizing the risk of inadvertent disclosures and enhancing overall confidentiality.
Employee Awareness:
Sellers who continue as employees within the acquired business must be acutely aware of the implications surrounding their post-closing communications with transaction counsel. Understanding that employer monitoring or access could compromise privilege underscores the need for caution. Sellers should exercise prudence in their communication channels, opting for secure platforms whenever discussing sensitive matters. Educating employees about these risks fosters a culture of awareness within the organization, reducing the likelihood of accidental breaches and preserving the confidentiality of privileged discussions.
[1] DLO Enterprises, Inc. v. Innovative Chemical Products Group, LLC
[2] Great Hill Equity P'rs IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155
