For the last number of years, when I am retained to provide sell-side representation in an M&A transaction, one of the very first things I do is insist that my client’s “deal team” personnel with whom I will be working establish private email addresses (Gmail, Yahoo, etc.) for the transaction. I tell them we should cease communicating with each other on their company email accounts through the company’s email servers. Almost always, I get a very puzzled response until I provide this explanation: “We are going to be having very sensitive communication about this transaction concerning the company and its operations. Once we close, who is going to own and have control over the email servers?” Following a bit of silence on the phone comes their answer. “The buyer.” To which I respond, “That is correct, and they will be able to go through and review every one of those emails.” Once I have explained this, the client’s deal team promptly establishes private email addresses and we go forward from there. But I have rarely heard of anyone else doing this, so I figured it was just my own, perhaps overly cautious nature, guiding me.
A recent Delaware Chancery Court opinion dated 29 May 2019 gave me comfort that this was indeed a good idea. The case is Shareholder Representative Services LLC vs. RSI Holdco, LLC et. al. In summary, the buyer sued the seller subsequent to the closing and wanted to introduce into evidence email communications between the seller’s transaction team and legal counsel. The emails were on the target’s email servers; now owned by the buyer. The question before the Delaware Chancery Court was: “When may a buyer use the acquired company’s privileged pre-merger attorney-client communications in post-closing litigation against the sellers?” The Chancery Court reviewed the relevant case law which confirmed that unless otherwise contractually addressed, the target’s email servers and the content on them was indeed owned by the buyer as a matter of law once the transaction closed. Citing the prior Delaware case, the Court also referred to the recommendation handed down in the prior opinion which provided that future sellers should “use their contractual freedom” to avoid waiver; meaning to include in the definitive purchase agreement language which preserves and protects the privileged nature of the communication so that it cannot be introduced into evidence in post-closing litigation.
What struck me from reading the opinion, however, was that this only addresses one issue; namely the use of such email communications as evidence in post-closing litigation. I believe the risk for sellers and their counsel is broader in two relevant ways.
First, even if the emails themselves cannot be submitted into evidence, they still provide highly valuable information to the plaintiff and its legal counsel on what to look for, who has information, and what questions to ask in discovery in order to get essentially the same information into evidence, just not using the emails themselves.
Second, consider the post-closing indemnification process. In most transactions not involving a public company target, a portion of the purchase price is placed into an indemnification escrow, or as is happening more frequently, representation and warranty insurance are put in place. The buyer is motivated to tap into that escrow or obtain a recovery from the representation and warranty insurance in order to lower its effective cost of the acquisition. So even without a litigation scenario, and even if the Court’s recommendation to provide protective language in the definitive purchase agreement is included, it will not keep a motivated buyer from mining the emails to seek out information from which claims for indemnification could be made.
Accordingly, I submit that even if the protective contractual language is included in the definitive purchase agreement, a case can be made in sell-side transactions that communication between legal counsel and the seller’s deal team should not take place on the target’s email systems.
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