NY Appellate Division Affirms Seller Retains Privilege for Certain Pre-acquisition Communications

December 9, 2019

On Nov. 27, 2019, the New York Appellate Division for the Second Department affirmed New York’s longstanding rule that the attorney-client privilege regarding pre-acquisition or pre-merger communications about the transaction and related negotiations does not pass from the selling entity to the buyer, but remains with the seller or its representative.

In Askari v. McDermott, Will & Emery, LLP, the plaintiff-appellants, Kevin Askari and Sina Drug Corp., brought an action for replevin against McDermott, their prior law firm, asserting that they were entitled to certain attorney-client privileged files in the firm’s possession regarding a series of transactions that included the sale of membership interests in Sina’s successor entity. Askari served as the sellers’ representative for the selling shareholders under the membership interest purchase agreement (MIPA), which was governed by Delaware law.

The appellants argued that New York law applied to the dispute because New York had the greater interest in the litigation, notwithstanding the Delaware choice-of-law provision in the MIPA, and that the MIPA was but one of many agreements at issue. Under New York law, while the buyer or successor entity in a merger or acquisition does obtain control over attorney-client communications made prior to the acquisition process and in the normal course of business, attorney-client communications made during the acquisition transaction and its negotiation remain with the selling entity or its representative. As a result, the appellants contended, the sellers retained the acquisition-related attorney-client privileged communications at issue. In opposition, McDermott argued that Delaware law applied in accordance with the MIPA and that, under Delaware law, the attorney-client privilege concerning all pre-merger or acquisition communications passes to the buyer, regardless of whether the communications were made during the acquisition or in the normal course of business.

The Second Department, in a decision reversing the trial court, agreed with the appellants, holding that New York law applied because while the MIPA was governed by Delaware law, the MIPA was only one part of a larger reorganization and series of transactions and agreements, most of which were governed by New York law. The court went further and explained that the dispute did not arise under the MIPA or implicate its choice-of-law provision, as the claims at issue sounded in replevin (an action to recover the documents in McDermott’s possession that belong to the appellants), rather than one concerning the interpretation or enforcement of the MIPA.

In its decision, the court highlighted the litigation’s strong nexus to New York and the public policy behind New York’s rule that sellers retain transaction-related privileged communications after a merger or acquisition. Specifically, that New York corporations that merge with other, foreign corporations should be able to access privileged material regarding the transaction in the event that they need to pursue claims against their counsel or the newly formed or acquiring entity. This stands in contrast to Delaware law, which leaves it to the contracting parties to carve out such attorney-client privileged communications if they wish to avoid the default rule that they pass to the buyer or successor.

While New York is protective of the attorney-client privilege of pre-merger communications made during the acquisition process (when the selling and buying entities are in an adversarial relationship), given the sensitive nature of such communications and the possibility that the law of another state could apply, sellers should heed the advice of Delaware courts and proactively exclude the pre-merger attorney-client privilege from the assets that pass to the buyer in a purchase agreement.