Maybe someone should invent Snapchat for email, a read-once-and-it-disappears app for email so you never have to worry about being hacked, or in the case of a merger, having your private communications with counsel disclosed and used against you.
Here's how that works. After months of negotiating, countless drafts of documents, hundreds of emails, calls, and messages with counsel, you made it to closing and sold the company. It was emotional, complicated, and full of difficult choices, and your pre-closing communications with counsel are suffused with those thoughts, decisions and emotions. Now after the closing, the buyer, who’s in possession of the company email and voicemail servers, has the ability to look at all of those communications, drafts, and messages. What? That’s crazy! you say. It’s all confidential and subject to attorney client privilege! If the buyer could see all our negotiation strategies, draft language, and disclosure discussions, it would be like handing them a gun to point at us.
It is true that confidential communications between attorney and client are subject to legal privilege, which means they can’t be used as evidence in a court action. But a line of cases in Delaware has held that the attorney-client privilege with respect to pre-closing communications is transferred to the buyer at closing along with all the other assets, liabilities and rights of the seller company in a merger. When the privilege is transferred to the buyer, the buyer can simply waive it. The buyer would then be free to use those communications against you. Since it’s not uncommon for a buyer to sue the selling shareholders for fraud or breach of a representation and warranty, you can bet that those presumed-confidential, pre-closing communications between selling shareholders and counsel might be really helpful to the buyer in such an action. Since those Delaware cases came down, lawyers have tried several approaches - so far untested - to keep this from happening, one of them suggested by a judge in one of the Delaware cases.
Judges are criticized for opinions that include points not relevant to the case at hand, called dicta, so naturally, the judge in one of the Delaware cases wagged his finger at counsel saying that the parties could have avoided the privilege problem by contracting around the issue. In other words, the lawyers should have added provisions to the purchase agreement which carved out pre-merger negotiations from all of the things being transferred to the buyer. As a result of that unhelpful dicta, some attorneys now draft language in the purchase agreement to the effect that all communications between the sellers and counsel are subject to the privilege and the privilege does not transfer to the buyer regardless of the structure of the transaction. Another related mechanism is to provide in the agreement that the privilege is transferred to the buyer, but the buyer can’t use pre-closing communications or waive the privilege to make a claim against the sellers. This after all is what we’re concerned about.
Those attempts to draft around the problem sound great in theory, but they ignore the unwelcome reality that the buyer still has access to those communications post-closing. That access alone may be a deemed waiver of the privilege. Does the contractual prohibition against using privileged communications against you actually work? Maybe. It might chill a prospective lawsuit, but it certainly isn’t going to keep the buyer from seeing them, and if the buyer uses an email you wrote as evidence in an action against you, you’re left with a long and expensive fight to prove the buyer was not permitted to use it. You can also bet that if there is a smoking-gun email that would help the buyer in a case against you, creative counsel for the buyer is going to find a way to use it, or since the buyer knows of its existence, counsel will try to get to that information another way.
The more practical solution is not to communicate on company-owned equipment or systems. When talks about a potential deal begin, and counsel is engaged, stop communicating on company email servers. Use a private non-company email account, and if you are using company computers and phones to access that email account, carve out the shareholders’ personal laptops, tablets, and mobile phones from the deal so that any residual information downloaded on those devices does not inadvertently fall into the hands of the buyer post closing. Instead of letting the buyer see the communications and potentially having an expensive drawn out fight over them, it seems wiser not to put those communications in hostile hands.
