How to Protect Privileged Communications Before and After a Sale

A small clause at the end of a purchase agreement can change the stakes for sellers who need to carefully protect their pre-closing attorney-client privilege in a merger or stock transaction.

Consider a situation in which, post-closing, a buyer discovers an issue with the company it acquired and consequently sues the sellers. The target company had pre-merger privileged emails with its outside counsel relevant to the disputed issue. Now, the buyer is attempting to use those emails to support its claim. Admissibility of the emails turns on the control of the attorney-client privilege over those emails.

Did the privilege pass to the buyer, who could waive said privilege and use sellers’ emails against them in their lawsuit? Or did the sellers retain control, so they may exercise the privilege and prevent admission of the emails in litigation?

This question arose in bioMérieux, Inc. v. Rhodes and is an example of a costly ambiguity sellers can prevent with clear drafting.

The Rhodes decision offers two key takeaways for practitioners involved in merger or stock transactions.

First, sellers should include a clear, well-drafted provision in the transaction agreement to maintain control over privileged communications and protect against unwanted disclosure or use after closing. Such a provision should address the right to control or assert the privilege and the access to and ownership of the communications.

Second, sellers shouldn’t limit the scope of such a provision to communications with designated mergers and acquisitions counsel but should ensure the provision covers all privileged communications regarding the merger agreement and its contemplated transactions.

The Rhodes court stated that the general rule is that post-merger attorney-client privilege follows the target company to the surviving entity. Absent an agreement to the contrary, this means the attorney-client privilege will be controlled by the buyer (the target’s new owner). Sellers can, and should, contract around this issue by allocating ownership and control of the privileged communications in their contract. However, as Rhodes recently demonstrated, it’s critical to be specific when drafting the scope of such provisions.

The Rhodes dispute arose when bioMérieux, Inc., a buyer of Specific Diagnostics, Inc., alleged that Paul Rhodes, the controlling stockholder of Specific, fraudulently concealed a government investigation of Specific and its affiliate during the merger negotiations. As evidence, bioMérieux sought to use an email from a lawyer who represented Rhodes and Specific in responding to the investigation. While advising with respect to the investigation, the lawyer’s email included advice related to the merger agreement.

The transaction’s merger agreement provided that attorney-client privilege regarding the merger agreement and its contemplated transactions would remain with the company securityholders (a defined term including Rhodes) and would not pass with the target. However, within the same provision, the merger agreement then restricted the buyer parties from seeking to obtain or access any privileged communications with “the Firm” (a defined term including only seller’s M&A counsel).

It’s this later portion of the provision which created the ambiguity.

Rhodes argued the email was subject to attorney-client privilege, which didn’t pass to bioMérieux or Specific after the merger, reasoning that the initial portion of the privilege allocation clause controlled (the attorney-client privilege over communications related to the merger agreement “shall not continue as the privilege of [Target] but instead shall be the sole privilege of the [sellers].”)

In turn, bioMérieux argued the later portion of the clause (which stated bioMérieux and Specific wouldn’t try to “obtain or access” privileged communications among “any Company Securityholder and any representative of the Firm related to this Agreement”) meant the email wasn’t included in the privileged communications controlled by sellers. The “Firm,” bioMérieux reasoned, was a defined term limited to Rhodes and Specific’s M&A counsel and the email in question was with a different law firm retained for the purpose of the investigation.

Rejecting bioMérieux’s argument that the provision only covered communications with the sellers’ M&A counsel, the court held the broader provision maintaining attorney-client privilege controlled, and that the email was a privileged communication regarding the merger agreement to be controlled by the sellers.

The court separated the issue of transfer of the privilege from ownership of or access to the privileged communications. In the court’s view, the merger agreement made clear that the parties understood the risk of having the privilege over confidential merger-related advice pass to the buyer, and they intended to prevent that from happening by drafting the controlling clause broadly. Consequently, the privilege wasn’t limited to communications with M&A counsel and the privilege over the email remained with the sellers.

Other law firms, such as regulatory, employment, or finance counsel, often provide related advice a seller may not want to be disclosed after closing. Taking time to clearly address the treatment of privileged communications up front can limit the considerable time and expense, and sometimes unintended consequence, of litigating an ambiguous provision after closing.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

An immaterial amount of this content was drafted by generative artificial intelligence.

Author Information

Sara Duran is partner at Sidley focused on complex corporate and transactional matters.

Grace Dau is an associate at Sidley focused on M&A as well as private equity transactions.

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