After a merger or acquisition, who is entitled to the seller's privileged documents post-closing? On September 20, 2016, the U.S. Bankruptcy Court for the District of Delaware provided an answer in the context of a of privilege dispute that arose after an acquisition. In In re Quicksilver Resources et al., 1:15-bk-10585 (Bankr. D. Del. 2016), the debtor Quicksilver Resources, Inc. ("Quicksilver") made a motion for an order authorizing the abandonment and disposal of certain legal documents in its possession to avoid turning those documents over to Bluestone Natural Resources II LP ("Bluestone"), the buyer. These documents included: (i) approximately 1700 documents from Quicksilver's legal department; and (ii) 22 boxes of expired oil and gas leases. See In re Quicksilver Resources et al., 1:15-bk-10585, Letter from Judge Silverstein to Counsel, Dkt. 1692, at 2. Bluestone argued that pursuant to the asset purchase agreement, it was entitled to all books and records related to certain oil and gas assets that were acquired. Id.
In deciding the issue, the Court looked to the terms of the contract. Specifically, with respect to the 1700 documents from Quicksilver's legal department, the Court held that the purchase agreement included a carve-out for "information entitled to legal privilege, including attorney work product and attorney-client communications." Id. Accordingly, the court held that Quicksilver was not required to turn the 1700 documents over. Id.1 However, the court ruled differently with respect to the expired oil and gas leases in Quicksilver's possession. In this regard, the court noted that, under the terms of the agreement, Bluestone was entitled to documents related to oil and gas assets and that there was no evidence showing that these leases were not related to any oil and gas assets. Id. at 3.
In the absence of a contractual provision, however, the answer to the question of who owns the seller's privileged documents post-closing, is not necessarily clear. In Commodity Futures Trading Comm'n v. Weintraub, 471 U.S. 343 (1985), the Supreme Court ruled that, "[w]hen control of a corporation passes to new management, the authority to assert and waive the corporation's attorney-client privilege passes as well." Id. at 349. In recent years, courts have generally applied this bright-line rule, but have also: (i) made certain distinctions between merger-related documents and general corporate documents; and (ii) emphasized the importance of expressly contracting for procedures governing the treatment of privileged documents.
In New York, for example, the Court of Appeals in Tekni-Plex, Inc. v. Meyner & Landis, 89 N.Y.2d 123 (1996) considered two different categories of privileged communications during a post-closing privilege dispute: (i) communications regarding general corporate operations; and (ii) communications concerning merger negotiations. Id. at 127. With respect to the latter category of documents, the court held that privilege stayed with the seller post-closing, given that such communications were made at a time when the seller and buyer had adverse interests. Id. at 138. Conversely, the Court held that the privilege relating to communications about general corporate operations passed to the buyer after the closing. Id.
In a divergent example from 2013, the Delaware Chancery Court considered a situation where the acquiring corporation brought suit against the members of the target corporation for fraudulent inducement in Great Hill Equity Partners IV LP v. SIG Growth Equity Fund I LLP, 80 A.3d 155 (Del Ch. Nov. 15, 2013).2 According to the acquirer, certain communications between the target corporation and its attorneys concerning the merger revealed the alleged fraud. Id. at 156. In short, the Court held that the categorical approach of Commodity Futures Trading Comm'n continued to apply, but that parties may contract around that rule in merger negotiations. Id. at 161–62. In Great Hill, the parties did not contract to carve out any privileged documents from the transaction. Id. Thus, the court held that the privileged documents passed to the buyer. Id. The court also noted that the seller did nothing to protect its privilege, even leaving the documents in the possession of the acquiring company for a year prior to taking any action. Id. Finally, the Great Hill Court distinguished the Court of Appeals' decision in Tekni on the grounds that it focused on New York policy and did not expressly cite DGCL § 259.3
Quicksilver Resources emphasizes that parties engaged in merger or acquisition negotiations should be cognizant of potential privilege issues that can arise post-closing and should specifically negotiate the ownership of privileged or other sensitive documents. As Quicksilver Resources indicates, in most cases, courts will respect and give deference to contractual provisions concerning the treatment of these types of documents. Accordingly, such provisions are important considerations in the context of any acquisition or merger. Privilege disputes could be avoided, or at least mitigated, if parties to a merger or acquisition include specific contractual provisions governing the treatment of privileged documents.
Footnotes
1 But cf. Great Hill Equity Partners IV LP v. SIG Growth Equity Fund I LLP, 80 A.3d 155, 161-62 (Del Ch. Nov. 15, 2013) (holding that legal privilege passed from a buyer to a seller where the buyer and seller did not contract to carve out privileged documents from the transaction).
2 The court decided this dispute in the context of Delaware General Corporation Law Section § 259(a), which provides, in pertinent part, that "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...." DGCL § 259(a).
3 Notably, in Newspring Mezzanine Capital II, L.P. v. Hayes, No. 14-1706, 2014 U.S. Dist. LEXIS 169900 (E.D. Pa. Dec. 9, 2014), the United States Court for the District of Pennsylvania rejected the Tekni approach and adopted the Great Hill approach.
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