What happens to the parties’ rights to assert solicitor-client privilege in the context of mergers and acquisitions?

The US Supreme Court has held that “when control of a corporation passes to new management, the authority to assert and waive the corporation’s attorney-client privilege passes as well. New managers installed as a result of a takeover, merger, loss of confidence by shareholders, or simply normal succession, may waive the attorney-client privilege with respect to communications made by former officers and directors.”

More recently, the Delaware Court of Chancery held that control over a target company’s solicitor-client privileged communications, including communications involving the negotiation of the transaction itself, pass to the surviving corporation. In that case, the purchaser alleged that the sellers had fraudulently induced it to acquire a corporation in a merger. Post-merger, the purchaser discovered privileged communications in the acquired corporation’s computer system regarding the transaction. The purchaser sought to introduce these communications as evidence. The sellers objected to the introduction of the documents on the basis that they were privileged and still belonged to the sellers. However, the Court found that the purchaser had acquired the right to waive privilege over the communications and could introduce the documents.

The Court’s decision was based in part on the language of the Delaware General Corporation Law 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”. This language is similar to the language used in the Ontario Business Corporations Act with respect to the effect of an amalgamation. Therefore, this case may be considered relevant by Ontario courts.

Although the law on this issue is not as well-developed in Canada, a similar issue has been considered by the Alberta Court of Queen’s Bench, with comparable results. The Court found that in acquiring 100 percent of the shares of a subsidiary of the seller, the purchaser acquired the subsidiary’s rights to claim or waive privilege. This included the legal advice that had been provided to both the seller and the subsidiary in the course of negotiating the Share Purchase Agreement and its closing. In making this determination, the Court noted that the Share Purchase Agreement did not contemplate an ongoing community of interest between the seller and the target company post-closing and distinguished certain US case law on this basis.

Thus, absent contractual language to the contrary, the default position, both in Canada and the United States, is that rights with respect to solicitor-client privilege pass to the acquirer or surviving corporation in the same way as any other right or interest passes in the context of a merger or acquisition.

However, both the US and Canadian courts also noted that it was open to the parties to negotiate a different result. Therefore, parties to a merger or acquisition agreement should be aware of this default position and consider whether a provision should be included in the agreement providing for an alternative treatment of pre-merger or pre-acquisition solicitor-client privilege.

Stay informed on M&A developments and subscribe to our blog today.