After a merger, who has the privilege?

The attorney-client privilege is central to our legal system. As a general matter, it protects from disclosure certain communications between an attorney and a client. Under the law, the client controls the privilege and, thus, may prevent a lawyer from revealing those communications. Conversely, the client may waive the privilege, thus allowing the attorney to disclose those communications. This concept is straightforward in the context of a lawyer representing a single individual. It can quickly get complicated, however, when a lawyer represents a corporation or other business entity. As a general matter, attorney communications with at least certain members of an entity’s management can be subject to the privilege. A company’s management is generally deemed to control the privilege.Who controls the attorney-client privilege after all or part of a business entity is sold or acquired? To say the least, this is an often overlooked question in the context of considering a business transaction. It can, however, have practical consequences down the road.The answer largely depends on the nature of the transaction. There are a variety of ways in which business entities can change ownership. New Hampshire courts will generally look to the “practical consequences” of a transaction to determine which entity – the company that has the privilege or the company that acquires that company — can assert, and just as importantly, waive the attorney-client privilege.The focus of the “practical consequences” test is whether a transaction transfers control of business operations, rights and liabilities, or only assets or property.As a general rule, in the context of an asset purchase and sale, the attorney-client privilege does not transfer from sellers to buyers. However, when business operations are continued, as in the case of a stock transfer, the attorney-client privilege does transfer to new management. Management of the successor company may even assert or waive the privilege for communications made prior to the stock transfer.The “practical consequences” test involves a case-by-case analysis of the particular facts and circumstances involved before determining who controls the attorney-client privilege. The test distinguishes between a company that purchases the assets of another company, but makes no attempt to continue its pre-existing business operations, and a company that continues its predecessor’s business and manages its operations.Why the privilege?There is logic to these rules. An asset sale transfers only ownership over property, not control of the establishing corporation itself, and therefore does not transfer the attorney client privilege. The attorney-client privilege is an incident of corporate control. It does not adhere to assets or property of the entity.Equally, it makes sense that parties who negotiate a corporate acquisition should expect that the privileges of the acquired corporation would be incidents of the sale, subject to the terms of any agreements. The client controls the attorney-client privilege.If a corporation or other entity is the lawyer’s client, a change in ownership does not change the client, just as a change in management does not change the client. There is no change to the legal status of the company, only a change in ownership.There are benefits to this presumption. Transfer of the attorney-client privilege can allow the successor entity to pursue pre-existing rights or defend pre-existing liabilities for the benefit of the company.The results of this rule are that new managers installed after a purchase, merger or takeover, may waive the attorney-client privilege for communications made by former officers and directors. Those former officers – the ones who actually made the privileged communications – cannot assert the attorney-client privilege against the wishes of current officers or managers.Establishing management or ownership might avoid this potential outcome by an agreement with successor ownership regarding special access to, or control over, certain privileged communications. Such an agreement may be particularly desirable to protect an interest which the transferor may retain in any contracts or liabilities of the business.At the very least, parties involved in the transfer of a business should consider how the terms of the transaction may affect their ability to assert or waive an important legal privilege.
Gordon MacDonald, a litigation and dispute resolution partner in Nixon Peabody’s Manchester office, can be reached at 603-628-4068. Brian Duffy, a litigation and dispute resolution associate in the firm’s Manchester office, can be reached at 603-628-4009.