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12/23/14: Gilbert & Renton Obtains Favorable Post-Acquisition Privilege Transfer Ruling

Gilbert & Renton partners Jeff Renton and Matt Ginsburg obtained a favorable ruling in the (MA) Superior Court's Business Litigation Session, that in acquiring a separate entity - BBN Technologies Corp., in 2009 - its client, Raytheon Company likewise acquired and subsequently held all rights to the attorney-client privilege held by BBN prior to the transaction. Massachusetts Lawyers Weekly noted the ruling in an article published on November 13, 2014:

Survivor of Merger controls attorney-client privilege

By: Pat Murphy -- November 13, 2014

Shareholders were not entitled to the disclosure of privileged communications between a technology company and the companys outside counsel concerning a proposed merger when they later sued over the terms of the completed deal, the Superior Court 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 Company.

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

ғUnder 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 in Novack v. Raytheon Company, Lawyers Weekly No. 12-118-14.  The full text of the ruling can be ordered by clicking here.

Check those 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 attorney Jeffrey B. Renton, who represented defendant Raytheon in the case.

Renton explained that the decision in Novack was in large part dictated by the language of DelawareԒs merger statute.

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

Carl F. Barnes maintains a corporate practice with Morse, Barnes-Brown & Pendleton in Waltham.  He suggested the same result might not be reached in a case governed by the Massachusetts Business Corporate Act.

Under Delaware law, said Barnes, the effect of a merger is the conveyance of all property, rights, privilege, powers and franchisesӔ 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 Ǔall property owned and ԓevery contract right possessed by the entity that is merged into the survivor.

ԓTheres probably more room for interpretation in Massachusetts than there is in Delaware,Ҕ Barnes said.  But he said theres still a strong argument to be made under Massachusetts law that the control of the attorney-client privilege passed to the surviving corporation in a merger.

ғIt 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.  ԓIf youre merging, and youҒre 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 Berluti, McLaughlin & Kutchin cautioned that attorneys need to address this issue when drafting an acquisition document.  ԓYou 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 ԓown their attorney-client communications after a deal is done.  ԓInsofar as theres any uncertainty, thereҒs an easy solution, he said.  ԓWrite 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 BBNԒs merger into a Raytheon subsidiary formed for that purpose, and the subsidiarys subsequent merger into Raytheon.  Raytheon, BBN and the Raytheon subsidiary all were incorporated under Delaware law.

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

The merger agreement negotiated by the parties provided that ғall property, rights, privileges, immunities, powers, franchises, licenses, and authority of [BBN] and [Raytheons 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.Ҕ

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 these 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 corporations 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 this 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.

DelawareҒs 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.Ӕ

Echoing the statute, the parties merger agreement specifically provided that ғall privilegesŔ 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 noted 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 companys shareholders that they controlled the privilege protecting the acquired companyҒs 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 states corporation statute.

While Billings noted that Great Hill didnҒt carry the same weight as a decision from the Delaware Supreme Court, he said that 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,Ӕ he wrote.

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