SHAREHOLDER REPRESENTATIVE SERVICES LLC, as representative of the stockholders and optionholders of Radixx Solutions International, Inc., Plaintiff/Counterclaim Defendant,
RSI HOLDCO, LLC and TA XII-A, L.P., Defendants/Counterclaim Plaintiffs. RSI HOLDCO, LLC and TA XII-A, L.P., Third-Party Plaintiffs,
RONALD J. PERI, JAMES L. JOHNSTON, THOMAS R. ANDERSON, DENIS P. COLEMAN, and JUDI LOGAN, Third-Party Defendants.
Submitted: February 21, 2019
Koch, Susan M. Hannigan, Matthew W. Murphy, RICHARDS, LAYTON
& FINGER, P.A., Wilmington, Delaware; Christopher F.
Robertson, Alison K. Eggers, SEYFARTH SHAW LLP, Boston,
Massachusetts; Counsel for Shareholder Representative
Services LLC, Ronald J. Peri, James L. Johnston, Thomas R.
Anderson, Denis P. Coleman, and Judi Logan.
P. DiTomo, Jarrett W. Horowitz, MORRIS, NICHOLS, ARSHT &
TUNNELL LLP, Wilmington, Delaware; Roberto M. Braceras, Adam
Slutsky, Ezekiel L. Hill, GOODWIN PROCTER LLP, Boston,
Massachusetts; Counsel for RSI Holdco, LLC and TA XII-A, L.P.
following scenario is quite common: In merger negotiations,
the target company and the buyer retain their own attorneys.
At closing, the target company and all of its assets transfer
to the buyer by way of the surviving company. That transfer
involves the transfer of computer systems and email servers,
which contain pre-merger communications between the target
company's owners and representatives (i.e., the sellers)
and the target company's counsel. Thus, in a post-closing
dispute between the sellers and buyer, the buyer possesses
the target company's privileged pre-merger
attorney-client communications, including those concerning
common scenario gives rise to the question currently before
the Court: When may a buyer use the acquired company's
privileged pre-merger attorney-client communications in
post-closing litigation against the sellers?
Court of Chancery previously addressed this issue in
Great Hill Equity Partners IV, LP v. SIG Growth Equity
Fund I, LLLP. The Court held that by operation of
Section 259 of the Delaware General Corporation Law (the
"DGCL"), all assets of a target company, including
privileges over attorney-client communications, transfer to
the surviving company unless the sellers take affirmative
action to prevent transfer of those privileges. In Great
Hill, the sellers did not retain their ability to assert
privilege over the pre-merger attorney-client communications
because they neither negotiated for language in the
merger agreement preserving the right to assert privilege
over the communications nor prevented the surviving
company from taking actual possession of the communications.
Thus, the Court held that the sellers waived their ability to
assert privilege. The Court further advised that in the
future sellers should "use their contractual
freedom" to avoid waiver.
case, the sellers used their contractual freedom to secure a
provision in the merger agreement, which preserved their
ability to assert privilege over pre-merger attorney-client
communications. That provision also prevented the buyer from
using or relying on those privileged communications in
post-closing litigation against the sellers. Yet, the buyer
argues that these contractual protections are insufficient.
Because the sellers did not excise or segregate the
privileged communications from the computers and email
servers transferred to the surviving company, the buyer
contends that the sellers waived privilege, and that the
buyer may thus use the communications in this litigation.
decision rejects the buyer's arguments, concluding that
the broad contractual language for which the sellers
negotiated prevents the buyer from using the privileged
communications in this litigation.
Holdco, LLC ("Holdco") acquired Radixx Solutions
International, Inc. ("Radixx") in September 2016
pursuant to an Agreement and Plan of Merger (as amended, the
"Merger Agreement"). Seyfarth Shaw LLP
("Seyfarth") served as counsel to Radixx in
connection with the merger. The Merger Agreement designated
Shareholder Representative Services LLC
("Representative") as representative of
Radixx's selling stockholders.
the merger, Holdco obtained possession of Radixx's
computers and email servers. Those computers and servers
contained approximately 1, 200 pre-merger emails between
Radixx and Seyfarth (the "Emails"). As Holdco
acknowledges, at the time of the communications, the Emails
were presumably privileged. The Emails were not excised or
segregated from Radixx's other communications at the time
the merger closed.
13.12 of the Merger Agreement addresses pre-merger privileged
communications. Section 13.12 provides:
Any privilege attaching as a result of [Seyfarth]
representing [Radixx] . . . in connection with the
transactions contemplated by this Agreement  shall survive
the [merger's] Closing and shall remain in effect;
provided, that such privilege from and after the
Closing  shall be assigned to and controlled by
[Representative].  In furtherance of the foregoing, each
of the parties hereto agrees to take the steps necessary to
ensure that any privilege attaching as a result of [Seyfarth]
representing [Radixx] . . . in connection with the
transactions contemplated by this Agreement shall survive the
Closing, remain in effect and be assigned to and controlled
by [Representative].  As to any privileged attorney client
communications between [Seyfarth] and [Radixx] . . . prior to
the Closing Date (collectively, the "Privileged
Communications"), [Holdco], the Merger Subsidiary and
[Radixx] (including, after the Closing, the Surviving
Corporation), together with any of their respective
Affiliates, successors or assigns, agree that no such party
may use or rely on any of the Privileged Communications in
any action or claim against or involving any of the parties
hereto after the Closing.
reflected by the bracketed numbers, Section 13.12
accomplishes four objectives. Section 13.12: (1) preserves
any privilege attaching to pre-merger communications as a
result of Seyfarth's representation of Radixx in
connection with the merger; (2) assigns to Representative
control over those privileges; (3) requires the sellers and
buyer to take steps necessary to ensure that the privileges
remain in effect; and (4) prevents Holdco and affiliates from
using or relying on any privileged communications in
post-closing litigation against the sellers.
17, 2018, Representative commenced this litigation against
Holdco and its affiliate TA XII-A, L.P. ("TA"),
claiming that Holdco and TA breached the Merger Agreement and
a related agreement by failing to repay a "holdback
amount" withheld from the purchase price. On August 20,
2018, Holdco and TA asserted counterclaims/third-party claims
against Representative and five selling
Representative commenced this litigation, the parties
arbitrated and negotiated over certain purchase price
adjustment issues. The parties' dispute over the Emails
first surfaced in that context. In a letter to
Representative's counsel dated May 9, 2018, Holdco
informed Representative that it had discovered the Emails and
took the position that the sellers had waived any claim of
privilege over these Emails. Representative responded by
letter on May 14, 2018. Pointing to Section 13.12 of the
Merger Agreement, Representative informed Holdco that it
asserted privilege over the Emails and directed Holdco to
refrain from reviewing them. Holdco replied on May 16,
2018, and maintained its assertion of waiver.
Holdco seeks to use the Emails in this litigation. Toward
that end, on November 9, 2018, Holdco brought the
parties' privilege dispute before this Court, filing a
Motion for Disposition of Privilege Dispute. Through the
motion, Holdco seeks "full, unfettered access" to
the Emails. In response, Representative cross-moved
for entry of a protective order. The Court heard argument
on the parties' competing requests on February 21,
Great Hill, the buyer discovered communications
between the sellers and the selling company's attorneys
on the surviving company's computer
systems. It was undisputed that the parties'
merger agreement "did not carve out from the assets
transferred to the surviving corporation any pre-merger
attorney-client communications," and that "the
merger was intended to have the effects set forth in the
Court determined that Section 259 of the DGCL controlled.
Section 259 provides, "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 Court concluded that
"privileges" included evidentiary privileges over
attorney-client communications. Applying this rule, the
Court held that absent "an express carve out, the
privilege over all pre-merger communications-including those
relating to the negotiation of the merger itself- passed to
the surviving corporation in the merger . . .
sellers worried about losing the right to assert privilege
over their company's pre-merger communications with its
pre-merger counsel, Great Hill cautioned that
"the answer . . . is to use their contractual freedom .
. . to exclude from the transferred assets the