Attorney-Client Privilege Passes to Surviving Company; Court Refuses to Order That Merger Go Forth
By Che Odom
Delaware courts showed this past quarter that they can act very quickly to try a case when an acquisition is pending, and that they will pass the attorney-client privilege on to the surviving corporation in a merger, unless the parties contract for different terms.
In Great Hill Equity Partners IV LP v. SIG Growth Equity Fund I LLLP, the Delaware Court of Chancery interpreted Section 259 of the Delaware General Corporation Law to hold that all privileges–including the attorney-client privilege–pass in a merger from the acquired corporation to the surviving corporation (Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 2013 BL 316872, Del. Ch., No. 7906-CS, 11/15/13).
The court held that, without a contractual provision to the contrary, even the seller’s pre-merger attorney-client communications with respect to the merger itself would pass to the surviving corporation. The court suggested that parties concerned about this issue should “use their contractual freedom in the manner shown in prior deals to exclude from the transferred assets the attorney-client communications they wish to retain as their own.”
Communications About Merger
John Mark Zeberkiewicz, a transactional attorney and director at Richards, Layton & Finger, PA of Delaware, said during a Dec. 10 webcast presented by the firm, that the Great Hill opinion arose out of Great Hill’s acquisition of Plimus Inc. through a merger in which Plimus continued as the surviving corporation and wholly owned subsidiary of Great Hill.
Following the merger, Great Hill filed suit, alleging that the defendants, former stockholders and other representatives of Plimus, fraudulently induced Great Hill into the transaction, he said.
“Great Hill notified the sellers that it had discovered on the files in the Plimus computer system transferred in the merger, communications between the sellers and Plimus’ outside counsel regarding the transaction,” Zeberkiewicz said. “Plimus had not attempted to segregate those files or to excise them or recover them. In addition, the merger agreement did not address pre-merger attorney-client privileges.”
SIG Growth Equity, the seller, then asserted attorney-client privilege over those communications.
Who Controlled Privilege?
The court turned to Section 259 of the DGCL, which says that the property, rights, privileges, powers and franchises of the constituent entities are vested in the surviving corporation.
The sellers argued that the term “privileges” as used in the statute does not include the attorney-client privilege, Zeberkiewicz said.
“They claim that the term ‘privileges’ was intended to capture property rights, such as the privilege that adheres to copyright, and was not specifically intended to pick up privileges arising from rules of evidence, such as the attorney-client privilege,” he added.
SIG Growth Equity’s construction would have limited privileges to property rights, thereby ignoring the fact that Section 259 already uses the term “property” and “rights.”
“The sellers’ interpretation, in other words, would have rendered those words mere surplusage, and the court will not construe a statute in a manner that renders language surplusage if another interpretation is reasonably available,” Zeberkiewicz said.
“The court found that the term ‘privilege’ is commonly defined as a right or immunity granted as a peculiar benefit, advantage or favor, and that the attorney-client privilege is one of the most obvious examples.”
Parties can negotiate to prevent certain aspects of the privilege from transferring to the surviving corporation in the merger, the court said.
The court noted that Great Hill had submitted several excerpts from private company deals that contained such provisions.
“The court stated that the answer to parties concerned about these issues going forward is to use their contractual freedom to exclude the attorney-client communications they wish to retain from the transferred assets in the merger,” Zeberkiewicz said.
Cooper Tire v. Apollo
In Cooper Tire & Rubber Co. v. Apollo (Mauritius) Holdings Pvt. Ltd., Vice Chancellor Sam Glasscock III refused to order specific performance of a buyer’s obligation to close a merger (Cooper Tire & Rubber Co. v. Apollo (Mauritius) Holdings Pvt. Ltd., 2013 BL 296815, Del. Ch., No. 8980-VCG, 10/25/13).
Cooper and Apollo entered into a merger agreement in June in which Apollo would acquire all the outstanding shares of Cooper for $35 per share, with a termination date of Dec. 31. The transaction was valued at approximately $2.5 billion.
After the merger deal was announced, however, it faced some stumbling blocks: a labor union at Cooper’s Chinese joint venture went on strike and, domestically, the United Steelworkers (USW) said the merger agreement triggered its right to negotiate a new contract with Cooper or its successor, Raymond J. DiCamillo, a litigator and director at Richards Layton, said during the Dec. 10 webcast.
A federal arbitrator agreed with the USW, ordering that collective bargaining agreements with the USW be renegotiated prior to the close of the merger.
In response, Cooper sought an order to compel Apollo “to use its best efforts to negotiate a new contract” with the USW, as well as an order compelling Apollo to specifically perform its obligations under the merger agreement or, in the alternative, an award for money damages for breaches, according to the Chancery Court.
Despite its best efforts, Apollo said, it had not been successful in reaching an agreement with the union, according to DiCamillo.
Cooper said it needed the court to act before mid-November because the trouble with its Chinese joint venture would likely mean that Cooper would not be able to timely file fourth-quarter financial statements, effectively killing the merger agreement.
The court ordered an expedited trial to take place.
Cooper spent much of its focus at trial arguing that Apollo breached its obligations by conditioning any deal with the USW on a price reduction by Cooper. The court stated that while Apollo did not have a right to demand a price renegotiation, it was not a breach to ask for one, DiCamillo said.
“After a three-day trial and a closing argument,” Glasscock determined that “Apollo had not breached any best-efforts obligation by reason of the fact that it had not yet reached an agreement with the USW” and he refused to order specific performance, DiCamillo explained.
The order noted, however, that Apollo was under a continuing obligation to use such best efforts in negotiating with the USW and that it still had time to fulfill that obligation since the merger termination date was not until Dec. 31.
The Delaware Supreme Court accepted Cooper’s expedited interlocutory appeal, which it then dismissed Dec. 16.
“Notably, in its motion for expedited appeal, Cooper asked for an adjudication before Dec. 31, not mid-November, and as expected Cooper did not file its fourth quarter financial statements when they were due,” DiCamillo said. “The case demonstrates the willingness and ability of the Delaware courts to adjudicate important issues on a highly expedited time frame.”
Glasscock’s ruling does not definitively resolve this litigation, as a number of issues remain to be decided, DiCamillo said.
Those issues include:
• whether Cooper provided Apollo with required information in a timely manner;
• whether the situation in China results in a breach by Cooper of several representations, warrantees, covenants and obligations in the merger agreement;
• whether a material adverse event has occurred;
• whether Apollo is required to sign onto an agreement which Cooper entered into with the USW shortly before trial;
• what effect Cooper’s failure to file its financial statements has on the parties and financial sources’ obligations.
“All these issues will require an analysis of several provisions of the merger agreement and the interaction among them,” DiCamillo said.
Cooper announced Dec. 30 that it had terminated its sale to Apollo, based in India, after Apollo said that the financing it had arranged for the deal was no longer available.
Cooper Chairman, Chief Executive Officer and President Roy Armes said in a Dec. 30 news release that Cooper has not released Apollo of any of its unfulfilled obligations under the agreement, and the suit in the Court of Chancery continues.
To contact the reporter on this story: Che Odom in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Kristyn Hyland at email@example.com
Review of Recent Key Delaware Corporation Law Cases–Fourth Quarter 2013
|Mergers and Acquisitions||In re Sirius XM S’holder Litig. , 2013 BL 264761, Del. Ch., Civil Action No. 7800-CS, 9/27/13||Chancery Court dismisses a would-be shareholder class action challenging Liberty Media Corp.’s purchase of majority control over Sirius XM Radio Inc.|
|Delaware Law||Canmore Consultants Ltd. v. L.O.M. Med. Int’l Inc. , 2013 BL 252277, Del. Ch., No. 8645-VCG, 9/19/13||Where only a minority of board positions are filled, 8 Del. C. §223(c) allows shareholders holding at least 10 percent of the company’s voting stock to urge the court that the equities support a new election to allow the stockholders to fill the vacancies.|
|Delaware Law||In re BioClinica Inc. S’holder Litig. , 2013 BL 286451, Del. Ch., Consolidated Civil Action No. 8272-VCG, 10/16/13||Chancery Court dismisses an action by former BioClinica Inc. shareholders challenging the clinical research company’s sale to JLL Partners Inc., BioCore Holdings, Inc. and BC Acquisition Corp.|
|Delaware Law||Red Oak Fund LP v. Digirad Corp., 2013 BL 294142 , Del. Ch., C.A. No. 8559-VCN, 10/23/13||Chancery Court holds that the election for the Digirad Corp. board was valid.|
|Delaware Law||TVI Corp. v. Gallagher , 2013 BL 297748, Del. Ch., C.A. No. 7798-VCP, 10/28/13||Chancery Court says shareholders of iCueTV Inc. may proceed, in part, with certain breach of fiduciary duty claims in a derivative action over alleged improprieties by directors of the high-tech firm.|
|Mergers and Acquisitions||Cooper Tire & Rubber Co. v. Apollo (Mauritius) Holdings Pvt. Ltd., 2013 BL 316872, Del. Ch., No. 8980-VCG, 10/25/13||Chancery Court refused to order specific performance of a buyer’s obligation to close a merger.|
|Mergers and Acquisitions||In re Quest Software Inc. S’holders Litig., 2013 BL 313049, Del. Ch., No. 7357-VCG, 11/12/13||Chancery Court awards attorneys’ fees of $1 million to the plaintiffs under the corporate benefit doctrine.|
|Corporate Governance||Activision Blizzard Inc. v. Hayes, 2013 BL 319629, Del., No. 497, 2013, 11/15/13||Delaware Supreme Court explains its decision to vacate a preliminary injunction that blocked Activision Blizzard Inc.’s proposed buyback of Vivendi SA’s majority stake in the company.|
|Attorney-Client Privilege||Great Hill Equity Partners IV LP v. SIG Growth Equity Fund I LLLP, 2013 BL 316872, Del. Ch., No. 7906-CS, 11/15/13||The surviving corporation in a merger retains control of the attorney-client privilege regarding communications during merger negotiations, the Chancery Court rules.|
|Delaware Law||Anderson v. Krafft-Murphy Co. , 2013 BL 332016, Del., No. 85, 2013, 11/26/13||Delaware’s top court reverses and remands a dispute regarding receivership issues relating to a dissolved corporation, Krafft-Murphy Co., and its supply and installation of an asbestos-containing product that led to its being named in hundreds of asbestos-related personal-injury lawsuits.|
|Source: Bloomberg BNA|
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