You have probably heard the next phrase before, but this—actually happened.
As mentioned in the previous short piece regarding the black hole problem (1/2), many standardized terms (and boilerplate clauses) may be reused without reflection and become devoid of meaning. In short, they may turn into a contractual “black hole”—unintelligible to the parties and the courts. Even if standardized terms/boilerplate clauses have many advantages, they may also have (at least for one of the parties) shocking consequences.
We start with the obvious. Your lawyer may not, after your sale of the target, (a) use pre-closing communications with you for any other matters, and (b) represent the buyer in an indemnity claim against you as the seller. The first will be contrary to the lawyers’ confidentiality obligations toward you as a client. The second will be an obvious conflict-of-interest situation.
Hence, if the company is the seller, in an asset purchase agreement, it would normally be safe to assume that the company (as seller) will keep the attorney-client privilege (for simplification here including testimonial privilege and confidentiality entitlements). But it might not always be so straightforward, and in some cases it might be prudent to include it under “excluded assets”.
In a merger, the situation is more difficult. In Norway (and in many other jurisdictions), the Board of Directors in the two (or more) companies that merge shall negotiate and prepare a merger plan to be approved by the respective general assemblies. The merging companies will therefore need to obtain legal counsel. In most cases, the major shareholders will also be involved or consulted. But what happens when an indemnity claim (for breach of R&W) is made? Who controls the now dissolved target’s (the non-surviving company’s) attorney-client privileges? A court case in New York in 1996 ruled in a similar case that counsel for target could not represent the selling shareholders in an indemnification claim from the surviving company on conflict-of-interest grounds, and that the surviving company could not access communication between the counsel and target during deal negotiations. The first might be a surprise, but not the second.
The Great Hill court case (Delaware, 2013) goes further. The buyer in this case claimed that the sellers fraudulently induced the buyer to acquire Plimus (which was the surviving company in a merger).
The buyer discovered—a year after the transaction—on Plimus’ computer system certain communication between the then legal counsel of Plimus and the sellers. The sellers’ counsel argued that the sellers, and not the buyer, owned the attorney-client privilege related to this communication, while the buyer claimed that they now owned and controlled any pre-merger privilege of Primus.
The courts said that the sellers’ interpretation that “all” rights and entitlements that pass in a merger (standard wording of the law) do not include the attorney-client privilege was not a plausible interpretation of the wording of the law. It also stated that several articles had been written, encouraging practitioners to take the issue into account in deal agreements, and that members of the judiciary had no authority to “invent” judicially-created exceptions. Thus, since the sellers did not carve out the attorney-client privilege related to pre-merger communication from the transferred assets, this passed to the surviving company in the merger. For many, this for sure was (and probably still is) a black hole.