Massachusetts Court (Sort of) Adopts Delaware’s Great Hill Holding Regarding the Attorney-Client Privilege in Mergers

M&A Today
By: Carl F. Barnes
January 6, 2015

In an apparent case of first impression in Massachusetts, the Suffolk Superior Court ruled in Novack v. Raytheon Company (Civil Action No. 13-2852-BLS1) (Oct. 24, 2014), that when Company A acquires Company B, Company A owns and controls the attorney-client privilege applicable to communications between Company B and its counsel, “even as to communications concerning the merger and the negotiations preceding it.” In doing so, the Court applied the Delaware Chancery Court’s widely discussed decision in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP (Del. Ch. Nov. 15, 2013). But is Great Hill now the law in Massachusetts? Not so fast – the merger at issue in Novack was governed by Delaware law and all the Superior Court did was “accept [the Great Hill] holding as the law of Delaware, unless and until a Delaware or Massachusetts appellate court advises otherwise.” Whether Massachusetts law will follow Great Hill remains an open question.

The Novack Decision

The Superior Court’s decision arose out of the 2009 acquisition of BBN Technologies Holding Corp. by Raytheon Company. The merger agreement included certain representations and warranties regarding environmental issues that are now among issues being litigated by the parties. Raytheon contemplated taking depositions of BBN’s former in-house general counsel (now an employee of Raytheon) and one or more Ropes & Gray attorneys (BBN’s outside counsel on the merger), “to get their recollections on matters (including attorney-client communications) relating to the proper interpretation of a sentence in [schedules to the merger agreement] pertaining to the environmental representations.”

Mr. Novack argued that he, as the representative of BBN’s former shareholders, succeeded to BBN’s attorney-client privilege as it relates to pre-merger communications between BBN and its counsel relating to the merger and the merger agreement. Raytheon asserted that it, not BBN’s former shareholders, succeeded to the privilege.

The Superior Court’s holding confirms that Massachusetts courts will apply Great Hill to disputes governed by Delaware law, and that is hardly surprising – but how would the Massachusetts courts rule in a similar case governed by Massachusetts law?

What Will Massachusetts Do?

The Delaware Chancery Court presented the issue in Great Hill as one of straightforward statutory interpretation: Section 259 of the Delaware General Corporation Law (DGCL) provides that, following a merger, “all property, rights, privileges, powers and franchises, and all and every other interest shall be thereafter as effectually the property of the surviving or resulting corporation.” The Chancery Court said, in short, that the statute was very clear: “all means all … and that this includes all privileges, including the attorney-client privilege” [italics in the original]. The Court then declined to create a judicial exception to the words “all … privileges.”

Section 11.07(a)(3) of the Massachusetts Business Corporation Act uses more modest language than Section 259 of the DGCL: when a merger becomes effective “all property owned by, and every contract right possessed by each corporation or other entity that merges into the survivor is vested in the survivor without reversion or impairment.” Does the absence of words such as “rights, privileges, powers and franchises, and all and every other interest….” portend a different result? Time may tell, but I think not. The attorney-client privilege is not a “contract right” and is presumably not “property.” But a holding that Section 11.07(a)(3) means that the surviving corporation gets only the target’s property and contract rights – and nothing else – simply doesn’t make sense. And then there is the drafters’ Comment to Section 11.07(a), pointing out that “All pending proceedings involving either the survivor or a party whose separate existence ceased as a result of the merger are continued.” These “proceedings” are neither property nor contract rights specifically covered by Section 11.07(a)(3) either, and yet the drafters of the statute assume that the surviving corporation takes them over. A separate Comment, to Section 11.07(a)(8) of the Massachusetts Business Corporation Act, may also be telling: “…on the effective date of a merger the former shareholders of a corporation that is merged into the survivor are entitled only to the rights provided in the plan of merger … or to any rights they may have under Part 13” (addressing the rights of dissenters to obtain payment for their shares). I would expect a Massachusetts court to follow Great Hill and conclude that the effect of the statute is to vest in the acquirer all of the rights, privileges, powers and franchises and every other interest of a corporation acquired through a merger governed by Massachusetts law – including the attorney-client privilege with respect to communications concerning the merger and the negotiations preceding it.

And What Should You Do?

Regardless of whether my prediction turns out to be correct, lawyers representing sellers of corporations in mergers and stock purchases governed by Massachusetts law would be wise to assume that Novack is a signal, to pay attention to the Great Hill holding, and to learn from the many articles and law firm client alerts that followed it. Great Hill invited the parties to mergers to contract around its holding and it has quickly become common practice to do so.

Although the detailed contractual language is open to negotiation, our experience is that buyers and their counsel are generally willing to agree that sellers may retain the attorney-client privilege related to pre-closing communications, advice and negotiations regarding the merger itself. Agreements that sellers should retain the privilege with respect to all pre-closing attorney-client communications regarding the target’s historical general business operations may frustrate the legitimate interests of buyers and appear to be less common. And, of course, distinguishing between these two categories may be difficult with respect to any specific communications.

Specifying in the merger agreement who controls the privilege after the closing is only the beginning. Sellers and their counsel should also take steps to try to ensure that they do not inadvertently waive that very privilege. Concluding that the privilege had passed to the buyer as a matter of law, the Chancery Court in Great Hill did not consider the buyer’s alternative argument that the seller had waived the privilege. Calling this a “substantial issue,” however, the Chancellor was clearly troubled by the fact that the seller and its counsel had done nothing before the merger to segregate communications regarding the transaction or to excise them from the target’s computer system, even though the buyer would obviously obtain control over those computers. Nor, following the merger, did the seller or its counsel take any steps to get back computer records of communications between the seller and its counsel regarding the transaction for more than a year after the buyer notified the seller that it had discovered them.

At a minimum, as the parties begin to think about a potential transaction, there should be a careful discussion of how the attorney-client privilege actually operates. (And contrary to popular belief, merely including a lawyer on the “cc” line of an email does not automatically mean the email is privileged; on the other hand, a client may waive the privilege if, when sending critical information to its counsel in search of legal advice, it sends copies of the email to its accountant or investment banker.) The parties should also carefully consider who actually is the client who has the right to assert the privilege in the first place. In a merger, the client is typically the target company, not its shareholders, and so communications between even a very substantial shareholder and the target’s counsel may not be privileged.

Once those details are sorted through, clients and their counsel should consider establishing separate email accounts, independent of the target’s computer systems, for all communications related to the transaction. Sellers should also consider removing pre-closing communications and related information regarding the merger itself from the target’s computer systems and paper files before the closing. As a practical matter, completely excising that information may be impossible, and so contractual solutions should be crafted. The merger agreement should include provisions stating that any such material and information that is inadvertently provided to the buyer or that remains in the target’s control is the property of the seller and must be immediately returned to the seller upon discovery. The agreement should also include covenants that neither the target nor the buyer will claim a waiver of the attorney-client privilege or attempt to use any such material or information discovered after the closing against the seller in any subsequent dispute between them. 

Sellers might also ask buyers to agree that they will not read any materials found on the target’s computer systems that relate to the merger or at least that they will not actively search for those materials. I think the key provisions and covenants are those described in the preceding paragraph, but including these additional agreements may bolster the argument that the seller has taken reasonable steps to protect the materials and preserve the privilege – and therefore help address the “substantial issue” left open by Great Hill.

Finally, if a post-closing dispute does arise, the selling stockholders will frequently expect to be able to retain the target’s former counsel to represent them. Buyers, however, may seek to disqualify the target’s former counsel from representing the selling shareholders precisely because it had previously represented the target. Selling shareholders should therefore consider including provisions in the merger agreement to preserve their right to engage the target’s former counsel. Although some buyers might resist that request, our experience is that most buyers and their counsel accept the idea.

For more information on this topic, please contact Carl F. Barnes.