Shareholder Representative Services LLC v. RSI Holdco, LLC

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
SHAREHOLDER REPRESENTATIVE )
SERVICES LLC, as representative of )
the stockholders and optionholders of )
Radixx Solutions International, Inc., )
)
Plaintiff/Counterclaim )
Defendant, )
v. ) C.A. No. 2018-0517-KSJM
)
RSI HOLDCO, LLC and )
TA XII-A, L.P., )
)
Defendants/Counterclaim )
Plaintiffs. )
)
RSI HOLDCO, LLC and )
TA XII-A, L.P., )
)
Third-Party Plaintiffs, )
)
v. )
)
RONALD J. PERI, JAMES L. )
JOHNSTON, THOMAS R. )
ANDERSON, DENIS P. COLEMAN, )
and JUDI LOGAN, )
)
Third-Party Defendants. )
MEMORANDUM OPINION
Date Submitted: February 21, 2019
Date Decided: May 29, 2019
Rudolf Koch, Susan M. Hannigan, Matthew W. Murphy, RICHARDS, LAYTON &
FINGER, P.A., Wilmington, Delaware; Christopher F. Robertson, Alison K. Eggers,
SEYFARTH SHAW LLP, Boston, Massachusetts; Counsel for Shareholder
Representative Services LLC, Ronald J. Peri, James L. Johnston, Thomas R.
Anderson, Denis P. Coleman, and Judi Logan.
John P. DiTomo, Jarrett W. Horowitz, MORRIS, NICHOLS, ARSHT & TUNNELL
LLP, Wilmington, Delaware; Roberto M. Braceras, Adam Slutsky, Ezekiel L. Hill,
GOODWIN PROCTER LLP, Boston, Massachusetts; Counsel for RSI Holdco, LLC
and TA XII-A, L.P.
McCORMICK, V.C.
The following scenario is quite common: In merger negotiations, the target
company and the buyer retain their own attorneys. At closing, the target company
and all of its assets transfer to the buyer by way of the surviving company. That
transfer involves the transfer of computer systems and email servers, which contain
pre-merger communications between the target company’s owners and
representatives (i.e., the sellers) and the target company’s counsel. Thus, in a post-
closing dispute between the sellers and buyer, the buyer possesses the target
company’s privileged pre-merger attorney-client communications, including those
concerning merger negotiations.
This common scenario gives rise to the question currently before the Court:
When may a buyer use the acquired company’s privileged pre-merger attorney-client
communications in post-closing litigation against the sellers?
The Court of Chancery previously addressed this issue in Great Hill Equity
Partners IV, LP v. SIG Growth Equity Fund I, LLLP.1 The Court held that by
operation of Section 259 of the Delaware General Corporation Law (the “DGCL”),
all assets of a target company, including privileges over attorney-client
communications, transfer to the surviving company unless the sellers take
affirmative action to prevent transfer of those privileges.2 In Great Hill, the sellers
1
80 A.3d 155 (Del. Ch. 2013).
2
See id. at 157, 162.
1
did not retain their ability to assert privilege over the pre-merger attorney-client
communications because they neither negotiated for language in the merger
agreement preserving the right to assert privilege over the communications nor
prevented the surviving company from taking actual possession of the
communications. Thus, the Court held that the sellers waived their ability to assert
privilege. The Court further advised that in the future sellers should “use their
contractual freedom” to avoid waiver.3
In this case, the sellers used their contractual freedom to secure a provision in
the merger agreement, which preserved their ability to assert privilege over pre-
merger attorney-client communications. That provision also prevented the buyer
from using or relying on those privileged communications in post-closing litigation
against the sellers. Yet, the buyer argues that these contractual protections are
insufficient. Because the sellers did not excise or segregate the privileged
communications from the computers and email servers transferred to the surviving
company, the buyer contends that the sellers waived privilege, and that the buyer
may thus use the communications in this litigation.
This decision rejects the buyer’s arguments, concluding that the broad
contractual language for which the sellers negotiated prevents the buyer from using
the privileged communications in this litigation.
3
Id. at 161.
2
I. FACTUAL BACKGROUND
RSI Holdco, LLC (“Holdco”) acquired Radixx Solutions International, Inc.
(“Radixx”) in September 2016 pursuant to an Agreement and Plan of Merger (as
amended, the “Merger Agreement”).4 Seyfarth Shaw LLP (“Seyfarth”) served as
counsel to Radixx in connection with the merger.5 The Merger Agreement
designated Shareholder Representative Services LLC (“Representative”) as
representative of Radixx’s selling stockholders.6
Through the merger, Holdco obtained possession of Radixx’s computers and
email servers.7 Those computers and servers contained approximately 1,200 pre-
merger emails between Radixx and Seyfarth (the “Emails”).8 As Holdco
acknowledges, at the time of the communications, the Emails were presumably
privileged.9 The Emails were not excised or segregated from Radixx’s other
communications at the time the merger closed.10
4
C.A. No. 2018-0517-KSJM Docket (“Dkt.”) 2, Verified Compl. (“Compl.”) Ex. A,
Agreement and Plan of Merger; Dkt. 4, Compl. Ex. G, Ex. 2, Amendment to Agreement
and Plan of Merger.
5
See Dkt. 34, RSI Holdco, LLC’s Mot. for Disposition of Privilege Dispute (“Mot.”) ¶ 4;
Dkt. 42, Countercl. and Third Party Defs.’ Response to Mot. for Disposition of Privilege
Dispute and Cross-Mot. for Protective Order (“Cross-Mot.”) ¶ 1.
6
Merger Agreement § 11.09(a).
7
See Mot. ¶ 6.
8
Id.
9
Id. ¶ 1.
10
See id. ¶ 6.
3
Section 13.12 of the Merger Agreement addresses pre-merger privileged
communications. Section 13.12 provides:
Any privilege attaching as a result of [Seyfarth]
representing [Radixx] . . . in connection with the
transactions contemplated by this Agreement [1] shall
survive the [merger’s] Closing and shall remain in effect;
provided, that such privilege from and after the Closing
[2] shall be assigned to and controlled by [Representative].
[3] In furtherance of the foregoing, each of the parties
hereto agrees to take the steps necessary to ensure that any
privilege attaching as a result of [Seyfarth] representing
[Radixx] . . . in connection with the transactions
contemplated by this Agreement shall survive the Closing,
remain in effect and be assigned to and controlled by
[Representative]. [4] As to any privileged attorney client
communications between [Seyfarth] and [Radixx] . . .
prior to the Closing Date (collectively, the “Privileged
Communications”), [Holdco], the Merger Subsidiary and
[Radixx] (including, after the Closing, the Surviving
Corporation), together with any of their respective
Affiliates, successors or assigns, agree that no such party
may use or rely on any of the Privileged Communications
in any action or claim against or involving any of the
parties hereto after the Closing.
As reflected by the bracketed numbers, Section 13.12 accomplishes four
objectives. Section 13.12: (1) preserves any privilege attaching to pre-merger
communications as a result of Seyfarth’s representation of Radixx in connection
with the merger; (2) assigns to Representative control over those privileges;
(3) requires the sellers and buyer to take steps necessary to ensure that the privileges
remain in effect; and (4) prevents Holdco and affiliates from using or relying on any
privileged communications in post-closing litigation against the sellers.
4
On July 17, 2018, Representative commenced this litigation against Holdco
and its affiliate TA XII-A, L.P. (“TA”),11 claiming that Holdco and TA breached the
Merger Agreement and a related agreement by failing to repay a “holdback amount”
withheld from the purchase price.12 On August 20, 2018, Holdco and TA asserted
counterclaims/third-party claims against Representative and five selling
stockholders.13
Before Representative commenced this litigation, the parties arbitrated and
negotiated over certain purchase price adjustment issues. The parties’ dispute over
the Emails first surfaced in that context.14 In a letter to Representative’s counsel
dated May 9, 2018, Holdco informed Representative that it had discovered the
Emails and took the position that the sellers had waived any claim of privilege over
these Emails.15 Representative responded by letter on May 14, 2018.16 Pointing to
Section 13.12 of the Merger Agreement, Representative informed Holdco that it
11
Dkt. 1.
12
Compl. ¶¶ 3, 115–41.
13
The crux of their claims is that Radixx’s founder, Ronald J. Peri, fraudulently induced
Holdco and TA to close the Radixx merger by misrepresenting material facts. See Dkt. 13,
Defs.’ Answer and Affirmative Defenses, and Verified Compl. of Countercls. Pls. and
Third-Party Pls. at pp. 65–95 ¶¶ 83–89.
See Dkt. 34, Transmittal Aff. of Jarrett W. Horowitz in Supp. of RSI Holdco, LLC’s
14
Mot. for Disposition of Privilege Dispute (“Horowitz Aff.”) Ex. C at 4.
15
Horowitz Aff. Ex. B at 1–2.
16
Horowitz Aff. Ex. C.
5
asserted privilege over the Emails and directed Holdco to refrain from reviewing
them.17 Holdco replied on May 16, 2018, and maintained its assertion of waiver. 18
Now, Holdco seeks to use the Emails in this litigation. Toward that end, on
November 9, 2018, Holdco brought the parties’ privilege dispute before this Court,
filing a Motion for Disposition of Privilege Dispute.19 Through the motion, Holdco
seeks “full, unfettered access” to the Emails.20 In response, Representative cross-
moved for entry of a protective order.21 The Court heard argument on the parties’
competing requests on February 21, 2019.22
II. LEGAL ANALYSIS
In Great Hill, the buyer discovered communications between the sellers and
the selling company’s attorneys on the surviving company’s computer systems.23 It
was undisputed that the parties’ merger agreement “did not carve out from the assets
transferred to the surviving corporation any pre-merger attorney-client
17
Id. at 1, 4.
18
Horowitz Aff. Ex. D.
19
Dkt. 34.
20
Mot. ¶ 1.
21
Dkt. 42.
22
Dkt. 60.
23
80 A.3d at 156.
6
communications,” and that “the merger was intended to have the effects set forth in
the [DGCL].”24
The Court determined that Section 259 of the DGCL controlled. Section 259
provides, “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 . . . .”25 The Court concluded that “privileges” included
evidentiary privileges over attorney-client communications.26 Applying this rule,
the Court held that absent “an express carve out, the privilege over all pre-merger
communications—including those relating to the negotiation of the merger itself—
passed to the surviving corporation in the merger . . . .”27
For sellers worried about losing the right to assert privilege over their
company’s pre-merger communications with its pre-merger counsel, Great Hill
cautioned that “the answer . . . is to use their contractual freedom . . . to exclude from
the transferred assets the attorney-client communications they wish to retain as their
own.”28
24
Id. at 156, 162.
25
8 Del. C. § 259(a) (emphasis added).
26
See 80 A.3d at 157.
27
Id. at 162.
28
Id. at 161.
7
The sellers in this action heeded the Great Hill court’s advice—they used their
contractual freedom to secure Section 13.12 of the Merger Agreement. By its plain
and broad language, Section 13.12 preserved privilege over the Emails and assigned
control over the privilege to Representative. Indeed, Section 13.12 does more than
preserve the privilege. Its “no-use” clause provides that “none of the parties ‘may
use or rely on any of the Privileged Communications in any action or claim against
or involving any of the parties [to the Merger Agreement] after the Closing.’”29
Thus, Section 13.12 prevents Holdco from doing exactly what Holdco seeks to do—
use the Emails in litigation with the sellers.
In response, Holdco first argues that Section 13.12 does not apply. Holdco
reasons that the “no-use” clause applies on its face only to privileged
communications, and that the Emails at issue “are not privileged at this point in time
because any privilege was long ago waived” by the sellers’ post-closing conduct.30
Holdco’s first argument runs contrary to the express language of Section
13.12 of the Merger Agreement. Delaware law governs this analysis,31 and under
29
Cross-Mot. ¶ 2 (quoting Merger Agreement § 13.12).
30
Dkt. 46, RSI Holdco, LLC’s Reply in Further Supp. of Its Mot. for Disposition of
Privilege Dispute and Response to S’holder Representative Servs. LLC’s Cross-Mot. for
Protective Order ¶ 8 (emphasis added).
31
See Merger Agreement § 13.07 (“This Agreement []and any claims or disputes arising
out of or related hereto . . . shall in all respects be governed by, and construed in accordance
with, the Laws of the State of Delaware . . . .”).
8
Delaware law, “if the relevant contract language is clear and unambiguous, courts
must give the language its plain meaning.”32 Section 13.12 defines “Privileged
Communications” as “any privileged attorney client communications between
[Seyfarth] and [Radixx] . . . prior to the Closing Date[.]”33 Holdco does not
challenge the privilege as of the closing date, but rather rests its arguments on sellers’
post-closing conduct.34 Thus, regardless of whether the sellers waived privilege
subsequent to the closing date, the plain language of Section 13.12 bars Holdco from
using or relying on the Emails in this litigation.
Holdco further contends that “a merger agreement ‘carve-out’ provision[,]”
like Section 13.12, “does not render that privilege immune from subsequent
waiver.”35 On this point, Holdco parrots arguments made in Great Hill. There, the
buyer argued in the alternative that because the sellers failed to take “steps to
segregate” or “excise” the communications from the computer systems pre-merger
and had “done nothing” post-closing to “get these computer records back,” waiver
Westfield Ins. Gp. V. J.P.’s Wharf, Ltd., 859 A.2d 74, 76 (Del. 2004) (internal quotation
32
marks omitted).
33
Merger Agreement § 13.12 (emphasis added).
34
See, e.g., Mot. ¶ 2 (“[W]hether the privilege . . . was transferred to [Representative] at
the time of the merger is separate and distinct from whether [Representative] has since
waived the privileged.”); id. ¶ 3 (“[Holdco] obtained access to the emails following closing.
And in the two years since closing, [Representative] has done nothing to address the
disclosure of those emails to [Holdco] . . . .” (emphasis in original)).
35
Id. ¶ 14.
9
was warranted.36 Because the Court ruled that the privilege had passed to the
surviving company, the Court did not address the buyer’s alternative waiver
argument.37
Holdco’s argument for waiver would undermine the guidance of Great Hill—
which cautioned parties to negotiate for contractual protections.38 Permitting Holco
to both “use and rely on” the Emails would further render the express language of
Section 13.12 meaningless.39 Unsurprisingly, Holdco’s argument finds no support
in authority. As noted above, Great Hill did not resolve the waiver issue. As
putative support, Holdco cites to the Court’s remarks during oral argument held in
Great Hill. But read in context, those remarks do not actually support Holdco’s
position;40 they have no precedential value in any event. Holdco also cites to a white
36
Great Hill, 80 A.3d at 156.
37
Id. at 162 (“having decided that the attorney-client privilege for the documents passed
as a matter of law to the surviving corporation in the merger, these wavier-related
arguments need not be addressed”).
38
Id. at 160–61.
39
Delaware courts “will not read a contract to render a provision or term ‘meaningless or
illusory.’” Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010).
40
Holdco concedes that the Court in Great Hill did not rule on the issue of waiver, but
contends that Holdco’s position is the “clear teaching” of Great Hill based on the oral
argument transcript. Mot. ¶ 15 (citing Horowitz Aff. Ex. E, Great Hill Equity P’rs IV, LP
v. SIG Growth Equity Fund I, LLLP, C.A. No. 7906-CS (Del. Ch. Oct. 15, 2013)
(TRANSCRIPT) (“Great Hill Tr.”)). But the quote on which Holdco relies represents then-
Chancellor Strine’s efforts to understand counsel’s argument. See Great Hill Tr. at 12–13
(THE COURT: “But I take it your argument here is . . . . And if you match contractual
protection with . . . keeping the stuff, . . . then you have a fairly complete solution . . . .”).
Tellingly, later in the argument, then-Chancellor Strine stated: “[T]here are ways for
10
paper on Great Hill published in July 2016. That white paper does not support
Holdco’s position or have any effect on Representative’s ability to assert privilege
on behalf of Radixx’s sellers.41
Holdco’s arguments in support of waiver suffer another problem. Section
13.12 required all parties to the Merger Agreement to “take the steps necessary to
ensure that any privilege attaching as a result of [Seyfarth] representing [Radixx] . . .
in connection with the transactions contemplated by this Agreement shall survive
the Closing, remain in effect and be assigned to and controlled by the
[Representative].”42 Accordingly, for privilege to be waived, it would necessarily
be due in part to Holdco’s own failure to “take the steps necessary” to preserve it.
Holdco cannot argue that its own failure to preserve privilege should now inure to
its benefit.
III. CONCLUSION
For the above reasons, Section 13.12 of the parties’ Merger Agreement
operated to preserve the sellers’ privilege over the Emails. The Representative has
people to even do it contractually that don’t necessarily even involve the physical excision
of the documents . . . .” Id. at 85.
41
The white paper describes various issues regarding privilege left open by Great Hill and
a lack of consensus on how “selling companies are assigning rights of attorney-client
privilege related to pre-closing communications.” Horowitz Aff. Ex. A, Paul Koenig, What
to Make of the Great Hill Case – The M&A Bar is Not Yet in Agreement on How Best to
Address M&A Privilege Issues (July 2016).
42
Merger Agreement § 13.12.
11
the authority to assert that privilege in this litigation. And Holdco and TA are barred
from using or relying on the Emails in this litigation.
Holdco’s motion is hereby DENIED, and Representative’s cross-motion is
hereby GRANTED.
12