Since 2013, with a Chancery Court decision in Great Hills v. SIG, the default rule in Delaware General Corporate Law has been that attorney-client privilege of target company communications transfers to the surviving company after a merger. But in a useful ruling earlier this year that general counsel might have missed, parties can contract around that, the Delaware Superior Court makes clear. 

In the case, bioMerieux v. Rhodes, the surviving company in a 2022 merger says the target company and its main shareholder hid damaging information about a federal investigation the company was under while the companies were negotiating the deal. The investigation concerned a possible False Claims Act violation.  

The surviving company, called Specific Diagnostics, and the company that bought it, bioMerieux, are trying to access an email to the founder of the target company from his outside counsel that they claim will support their case that they’re the victims of fraud.  

The email, to Paul Rhodes, who founded Specific in 2011 and was its controlling shareholder until he sold the company to bioMerieux to create the surviving Specific company, is something bMx and Specific both want. But in the merger agreement they signed, a provision lets Rhodes and other securityholders of the target company maintain their privilege over communications about the merger. 

“The attorney-client privilege regarding this agreement … shall not continue as the privilege of [Specific] but instead shall be the sole privilege of [Rhodes and other securityholders of the target company],” the contract passage says. 

That passage, Judge Sheldon Rennie said in his May ruling, “makes clear that the parties understood the risks of having the privilege over the confidential merger-related advice pass to the buyer, and they intended to prevent that from happening.”

Based on the judge’s analysis of that and other passages, the contract is clear that only Rhodes and other securityholders of the target company, and not the surviving company, can waive the privilege.  

“Any privilege Specific might have had over the … email became the company’s securityholders’ privilege, not Specific,” the judge said. 

This decision, attorneys for MorrisJames say in an analysis, demonstrates that parties can contract around the default rule by agreement.

“Under the terms of the parties’ agreement, the attorney-client privilege remained with the seller-defendants and, thus, the buyer-plaintiffs were not entitled to use the privileged email,” the attorneys said. 

In an email to Legal Dive, a representative of bioMerieux said it could not comment on a case that’s still in litigation.