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Shareholder Representative Services LLC v. RSI Holdco, LLC.

Court of Chancery of Delaware

May 29, 2019

SHAREHOLDER REPRESENTATIVE SERVICES LLC, as representative of the stockholders and optionholders of Radixx Solutions International, Inc., Plaintiff/Counterclaim Defendant,
v.
RSI HOLDCO, LLC and TA XII-A, L.P., Defendants/Counterclaim Plaintiffs. RSI HOLDCO, LLC and TA XII-A, L.P., Third-Party Plaintiffs,
v.
RONALD J. PERI, JAMES L. JOHNSTON, THOMAS R. ANDERSON, DENIS P. COLEMAN, and JUDI LOGAN, Third-Party Defendants.

          Date Submitted: February 21, 2019

          Rudolf 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.

          John 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.

          MEMORANDUM OPINION

          MCCORMICK, V.C.

         The 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 merger negotiations.

         This 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?

         The Court of Chancery previously addressed this issue in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP.[1] 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.[2] 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.[3]

         In this 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.

         This 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.

         I. FACTUAL BACKGROUND

         RSI 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").[4] Seyfarth Shaw LLP ("Seyfarth") served as counsel to Radixx in connection with the merger.[5] The Merger Agreement designated Shareholder Representative Services LLC ("Representative") as representative of Radixx's selling stockholders.[6]

         Through the merger, Holdco obtained possession of Radixx's computers and email servers.[7] Those computers and servers contained approximately 1, 200 pre-merger emails between Radixx and Seyfarth (the "Emails").[8] As Holdco acknowledges, at the time of the communications, the Emails were presumably privileged.[9] The Emails were not excised or segregated from Radixx's other communications at the time the merger closed.[10]

         Section 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 [1] shall survive the [merger's] Closing and shall remain in effect; provided, that such privilege from and after the Closing [2] shall be assigned to and controlled by [Representative]. [3] 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]. [4] 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.

         As 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.

         On July 17, 2018, Representative commenced this litigation against Holdco and its affiliate TA XII-A, L.P. ("TA"), [11] 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.[12] On August 20, 2018, Holdco and TA asserted counterclaims/third-party claims against Representative and five selling stockholders.[13]

         Before 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.[14] 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.[15] Representative responded by letter on May 14, 2018.[16] 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.[17] Holdco replied on May 16, 2018, and maintained its assertion of waiver.[18]

         Now, 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.[19] Through the motion, Holdco seeks "full, unfettered access" to the Emails.[20] In response, Representative cross-moved for entry of a protective order.[21] The Court heard argument on the parties' competing requests on February 21, 2019.[22]

         II. LEGAL ANALYSIS

         In Great Hill, the buyer discovered communications between the sellers and the selling company's attorneys on the surviving company's computer systems.[23] 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 [DGCL]."[24]

         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 . . . ."[25] The Court concluded that "privileges" included evidentiary privileges over attorney-client communications.[26] 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 . . . ."[27]

         For 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 ...


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