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Merger survivor controls attorney-client privilege

Shareholders denied access to pre-merger communications

1222neih_2_RENTONShareholders were not entitled to the disclosure of privileged communications between a technology company and the company’s outside counsel concerning a proposed merger when they later sued over the terms of the completed deal, a judge in the Massachusetts Superior Court’s Business Litigation Session has ruled in a case of first impression.

The shareholders argued that control of the attorney-client privilege belonged to them as it related to communications concerning the acquisition of BBN Technologies Holding Corp. by the defendant, Waltham-based Raytheon Co.

But Judge Thomas P. Billings ruled that, under applicable Delaware law, control of the privilege passed to Raytheon as a result of the merger.

“Under the terms of the Merger Agreement and Delaware law Raytheon, not the BBN shareholders, control[s] the attorney-client privilege, even as to communications concerning the merger and the negotiations preceding it,” Billings wrote.

The seven-page decision is Novack v. Raytheon Company.

Check merger documents

The decision is the first time a Massachusetts court has weighed in on the issue of who owns the attorney-client privilege after a merger or other similar change of managerial control, according to Andover attorney Jeffrey B. Renton, who represented defendant Raytheon in the case.

Renton said the decision in Novack was in large part dictated by the language of Delaware’s merger statute.

“The statute essentially treats the attorney-client privilege as an asset,” Renton said.

Carl F. Barnes, who practices corporate law at Morse, Barnes-Brown & Pendleton in Waltham, said the same result might not be reached in a case governed by the Massachusetts Business Corporation Act.

Under Delaware law, Barnes said, the effect of a merger is the conveyance of “all property, rights, privileges, powers and franchises” to the surviving corporation. On the other hand, G.L.c. 156D §11.07(a)(3) is more narrowly drawn, providing merely that the surviving entity is vested in “all property owned” and “every contract right possessed” by the entity that is merged into the survivor.

“There’s probably more room for interpretation in Massachusetts than there is in Delaware,” Barnes said.

But he said there is still a strong argument to be made under Massachusetts law that the control of the attorney-client privilege passes to the surviving corporation in a merger.

“It defies logic that the successor will get the property and contract rights, and nothing else,” Barnes said.

Corporate lawyer Barry S. Scheer of Parker Scheer in Boston agreed that the ruling in Novack makes sense.

“If you’re merging, and you’re the acquiring company, and if there are in fact privileged communications with the company that merged into you, you would certainly want that comfort that those secrets are not waived,” Scheer said.

Edward D. Kutchin of Boston’s Berluti, McLaughlin & Kutchin cautioned that attorneys need to address the issue when drafting an acquisition document.

“You want to make sure that you mandate who will control the attorney-client privilege post-closing, particularly with respect to communications regarding a transaction,” Kutchin said.

Renton also emphasized that sellers need to address the issue in the deal documents if they wish to continue to “own” their attorney-client communications after a deal is done.

“Insofar as there’s any uncertainty, there’s an easy solution,” he said. “Write into your deal documents that attorney-client communications or other privileged materials relating to the negotiation and terms of the agreement itself will not be passing.”

Raytheon merger

Raytheon acquired BBN in 2009 as a result of BBN’s merger into a Raytheon subsidiary formed for that purpose, and the subsidiary’s subsequent merger into Raytheon. Raytheon, BBN and the Raytheon subsidiary all were incorporated under Delaware law.

The merger was negotiated by BBN’s general counsel at the time, Thomas Lintz, and BBN’s outside counsel, Ropes & Gray. Lintz became an employee of Raytheon following the merger.

The merger agreement negotiated by the parties provided that “all property, rights, privileges, immunities, powers, franchises, licenses and authority of [BBN] and [Raytheon’s subsidiary] will vest in the Surviving Corporation, and all debts, Liabilities, restrictions and duties of [BBN] and [the subsidiary] will become the debts, Liabilities, restrictions and duties of the Surviving Corporation.”

The plaintiff, Kenneth J. Novack, represented former BBN shareholders who sued Raytheon in Superior Court over the scope of an environmental indemnity provision in the merger agreement. In the course of discovery, the plaintiff indicated an intention to depose Lintz and certain Ropes & Gray attorneys concerning the environmental representations in the merger agreement.

In anticipation of the depositions, the plaintiff filed a motion asking the court to clarify whether the shareholders controlled the privilege regarding these pre-merger communications, or whether control of the privilege had passed to Raytheon.

Waivable privilege

Billings observed that Massachusetts courts had not addressed the issue of who controls the attorney-client privilege applicable to pre-merger communications. The general rule, the judge noted, had been enunciated by the U.S. Supreme Court in Commodities Future Trading Commission v. Weintraub. In that 1985 decision, the court held that when control of a corporation passes to new management the authority to assert the corporation’s attorney-client privilege passes to new management as well.

The plaintiff argued that Massachusetts courts should adopt an exception recognized by New York courts for attorney-client communications regarding the merger itself. The New York exception is based on the policy concern that attorney-client communications could be significantly chilled if corporate actors had to worry that their communications regarding merger negotiations could be used by the buyer against the seller in a subsequent lawsuit.

But Billings concluded that that policy argument, as appealing as it was, did not alter the well-settled principle that the attorney-client privilege may be waived and passed from one party to another.

On that issue, the judge found it noteworthy that all parties to the merger agreement were Delaware corporations and that the agreement itself specified that Delaware law applied.

Delaware’s corporation statute provides that, following a merger “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 as they were of the several and respective constituent corporations.”

Echoing the statute, the parties’ merger agreement specifically provided that “all … privileges” held by BBN would vest in Raytheon. Importantly, the merger agreement did not include a provision excluding pre-merger attorney-client communications from the assets acquired by Raytheon in the transaction.

Billings said that, in a closely analogous case, Great Hill Equity Partners IV v. SIG Growth Equity Fund I, the Delaware Chancery Court rejected the claim of an acquired company’s shareholders that they controlled the privilege protecting the acquired company’s pre-merger communications.

In the 2013 decision in Great Hill, the Delaware court decided that the privilege regarding pre-merger communications — including those relating to negotiation of the merger itself — passed to the surviving corporation in the merger by operation of the unambiguous language of the state’s corporation statute.

While Billings noted that Great Hill did not carry the same weight as a decision from the Delaware Supreme Court, he said the Delaware Chancery Court is widely recognized as speaking authoritatively on matters of corporate law.

“The Great Hill decision is, I believe, solidly reasoned, and I accept its holding as the law of Delaware, unless and until a Delaware or Massachusetts appellate court advises otherwise,” he wrote.

Given that Delaware law governed the parties’ merger agreement, Billings concluded that Raytheon, not BBN’s shareholders, controlled the attorney-client privilege concerning BBN’s pre-merger communications with counsel.

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