In a merger, the buyer inherits your privileged emails

In a Delaware merger, the attorney-client privilege over pre-closing communications, including candid emails with deal counsel, passes to the surviving company the buyer controls. A written carve-out that keeps that privilege with the selling owners or a person they name, and bars its use against them, reverses the default. Ask in the first draft.

Who owns the attorney-client privilege after you sell your business?

Ownership after a sale turns on the structure of the deal and on what the signed agreement says. In a Delaware merger, privilege over pre-merger communications vests in the surviving company. In a Delaware asset sale, deal privilege stays with the seller unless the purchase agreement says otherwise. In a stock purchase, the buyer controls the company and its privilege.

The privilege is not your personal comfort. It belongs to the entity, and the power to assert or waive it sits with whoever controls the entity. The Supreme Court settled that decades ago: when control of a corporation passes to new management, the authority to assert and waive the corporate privilege passes with it. That is why a stock purchase needs the same clause a merger does.

Case: Commodity Futures Trading Commission v. Weintraub, 471 U.S. 343 (1985).

One qualification a buyer will not volunteer: the company’s privilege and your own are not the same thing. Communications in which you were personally the client can stand on separate footing, and buyers contest that line. The question is never whether your lawyer keeps your secrets. It is who decides, after closing, that they are not secrets.

What did Great Hill decide about pre-merger emails?

Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP held that the word “privileges” in Section 259 of the Delaware General Corporation Law carries the attorney-client privilege to the surviving corporation. Absent an express carve-out, privilege over all pre-merger communications, including those about negotiating the merger itself, passed to the buyer.

A buyer acquired Plimus, Inc. by merger under an agreement silent on privilege, sued the former stockholders for fraud after closing, and found their emails with deal counsel on the systems it had acquired. The rule: the statutory word “privileges” reaches the evidentiary privilege, so it vests in the survivor along with the trucks and the trademarks. The buyer could read the sellers’ deal file and use it against them.

The court told sellers what to do: use their contractual freedom to exclude the communications they wanted to keep. I read the privilege section of a draft merger agreement before I read the indemnity, because the indemnity is the fight and the privilege section decides what ammunition the other side brings to it.

If your company is an LLC, do not assume a friendlier default. The Delaware LLC Act uses parallel vesting language, carrying all of the rights, privileges and powers of the merging companies into the survivor.

Law: 8 Del. C. 259, vesting the rights, privileges, powers and franchises of each constituent corporation in the survivor; 6 Del. C. 18-209(g).

Case: Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155 (Del. Ch. 2013).

Does a privilege carve-out in the merger agreement actually work?

A clear carve-out works under Delaware law. In Shareholder Representative Services LLC v. RSI Holdco, LLC, the Court of Chancery enforced a merger agreement provision that preserved pre-merger privilege, assigned it to the sellers’ representative, and barred the buyer from using those communications in post-closing litigation. Roughly 1,200 pre-merger emails stayed out of the buyer’s case.

The buyer’s argument there is the one that will be made against you. It conceded the emails were privileged when written, then argued the sellers waived that privilege because nobody segregated them from the transferred servers. The court rejected that. Where a merger agreement clearly and unambiguously preserves and assigns the pre-merger privilege and prohibits use of the communications, the holder need not also have prevented the buyer’s possession. Both sides had agreed to protect the privilege, and the buyer could not profit from its own failure.

Two limits. The holder there was a professional stockholders’ representative, uncommon on a sale this size and not what the reasoning turns on; the holder can be the selling owners or one individual they name. And the clause binds only the parties who signed it, so it will not stop an agency or an outside litigant who subpoenas the buyer.

The clause protected documents already sitting on the buyer’s server. That is the point of asking for it before signing rather than after.

Case: Shareholder Representative Services LLC v. RSI Holdco, LLC, C.A. No. 2018-0517-KSJM, 2019 WL 2290916 (Del. Ch. May 29, 2019).

Is an asset sale different from a merger?

An asset sale runs the opposite way under Delaware law. In DLO Enterprises, Inc. v. Innovative Chemical Products Group, LLC, the Court of Chancery held that privilege over the seller’s pre-closing deal communications stays with the seller unless the purchase agreement transfers or waives it. Structure changes the default, not the need for the clause.

In DLO the buyer bought substantially all of the assets, then fought with the sellers over defective product and demanded their withheld communications with counsel about the sale. The court read the agreement, found the buyer had not contracted for the seller’s privilege, and held it stayed behind.

The second half of DLO should change your behavior. Other emails ran between a seller and his lawyers on an account that transferred to the buyer, including messages sent after closing while he worked there. Applying the reasonable-expectation-of-privacy factors used for work email, the court found three of the four pointed toward production and the fourth neutral, partly because the buyer’s handbook told employees they had no privacy and its footer warned of monitoring. The court ordered briefing on a possible statutory override rather than ruling, but the direction is unmistakable.

Case: DLO Enterprises, Inc. v. Innovative Chemical Products Group, LLC, 2020 WL 2844497 (Del. Ch. June 1, 2020).

Which of your emails would a buyer actually want?

The documents at risk are not old lease questions. They are the deal file: the memos and emails created while you and your counsel decided what to disclose, how to word a representation, and what a known problem was worth. A buyer needs exactly those to prove an indemnification or fraud claim after closing.

• What your lawyer told you about the problem you did disclose, including any view that it was worse than the buyer understood.
• The decision not to add an item to a disclosure schedule, and the reasoning beside it.
• The drafting history of a representation, including the version you struck and the qualifier you fought for.
• Your own blunt sentences about the business, written when you believed nobody else would read them.

A buyer bringing a post-closing claim is trying to prove you knew. Your deal file is the cheapest proof of knowledge there is, and in a merger you hand it over at closing.

What has to be in the privilege carve-out?

A workable carve-out does three jobs at once. It names who holds the pre-closing privilege after closing. It defines the communications covered. It separately prohibits the buyer and the surviving company from using or relying on those communications in any dispute with the sellers. A clause that does only the first job is weak.

• Name the holder. The privilege is retained by and assigned to the selling owners, or to one person they name. Do not leave it to inference.
• Define the communications. Communications among the company, the selling owners, the holder, and counsel about the transaction, made at or before closing, including counsel’s files.
• Add the no-use clause. The buyer and the surviving company will not use, access, or rely on those communications against the sellers, copies may sit on transferred servers and devices without consequence, and inadvertent transfer is not a waiver.
• Match it to the structure. In a merger the clause displaces a statute; in an asset sale it confirms one.
• Make it survive. Privilege terms that die at closing with the rest of the covenants are decorative.

Raise it in the first markup, with the rest of your comments. The same request at eleven at night before signing looks like you are hiding something, and invites a trade.

Does Delaware law even apply to your deal?

Not automatically. Great Hill, RSI Holdco, and DLO are Delaware Court of Chancery decisions applying Delaware statutes to Delaware-law agreements. Which law supplies the default depends on the survivor’s state of organization, on the governing-law clause you sign, and on the choice-of-law rules of the court that hears the fight. Courts elsewhere have answered differently.

Great Hill shows why the certificate of incorporation is not the end of it. The target there was a California corporation; Section 259 governed because the merger agreement said the merger would have the effects set out in the DGCL. The clause you sign can import the default you wanted to escape.

New York split the question. In Tekni-Plex, Inc. v. Meyner and Landis, the Court of Appeals held that control over the predecessor’s general business communications passed to the surviving corporation, while privilege over the merger negotiation itself stayed with the selling side. The target there was a Delaware corporation, and the New York court applied New York privilege law. Where the fight is heard matters too.

Case: Tekni-Plex, Inc. v. Meyner and Landis, 89 N.Y.2d 123 (1996).

The statutes diverge too. Section 259 uses the word “privileges,” and that word is the hook Delaware used. Many states instead follow the Model Business Corporation Act formulation, vesting in the survivor all property owned by and every contract right possessed by the merging entity. That language lacks the word, which is a difference in text, not a holding. A court there is free to treat the privilege as property that vests anyway.

Law: Model Business Corporation Act 11.07, as enacted in states including Massachusetts, G.L. c. 156D, s. 11.07, and Maine, 13-C M.R.S. 1107.

None of that is a reason to relax. It is a reason to stop guessing.

The carve-out costs you one paragraph in a document that already runs dozens of pages. The default costs you your own file.

How do you keep deal communications off the system that transfers with the business?

The practical half of the fix is physical. Deal communications should not live on the company email domain, the company server, or the company laptop, because all three usually transfer with the business. A clean contract can protect documents already in the buyer’s hands, as RSI Holdco shows. DLO shows why that should not be your only protection.

Use an email address the company does not own and the buyer will not acquire, and tell your counsel, accountant, and broker to use it for transaction traffic. Keep diligence workpapers and schedule drafts off the company network. I ask which email accounts, devices, and archives transfer at closing before I ask what is in them.

If you stay on as an employee after closing, the discipline gets stricter. The account is the buyer’s and so is the handbook. Write to your counsel from your own address.

One caution. This is forward-looking discipline, not a cleanup. Once a dispute is live or reasonably foreseeable, deleting material creates a worse problem than the one you were solving.

What should you do in the next two weeks?

Three steps close most of this gap before a letter of intent is signed. Confirm the state where your company is organized and the structure the buyer proposes. Set up a communication channel the buyer will not acquire. Instruct your counsel to put a carve-out and a no-use clause in the first markup.

• Pull the certificate of incorporation or formation, then read the governing-law clause. Both feed the answer; neither settles it alone.
• Ask your counsel, in writing, whether the deal is a merger, an equity purchase, or an asset sale, and what that means for your privilege.
• Create the outside email address today and move transaction traffic to it, including messages with your broker and accountant.
• Decide who holds the privilege after closing, the selling owners as a group or one person you name, since the clause must name a holder.
• Read the privilege language before the indemnity cap, and confirm it survives closing.

Delaware has not walked back the Great Hill default, and the later decisions reinforce both halves: a clear carve-out is enforceable, and an asset sale starts from the opposite presumption. Ask for the clause in every structure, in every state.