If you are a seller in an M&A transaction, you may have exchanged confidential and sensitive communications with your legal counsel during the course of the deal. These communications are protected by solicitor-client privilege, which is a fundamental principle of law that shields them from disclosure to third parties. However, what happens to these communications after the deal closes? Can the buyer access them and use them against you in any post-closing dispute? How can you preserve your privilege and prevent this from happening?
The answer may depend on whether you have included a "Great Hill clause" in your purchase agreement. A "Great Hill clause" is a contractual provision that allows the seller to retain control over the target's pre-closing privileged communications with legal counsel, and prevents the buyer from using them in any post-closing litigation. The name comes from a 2013 decision of the Delaware Court of Chancery, Great Hill Equity Partners IV v SIG Growth Equity Fund I, where the court held that, under Delaware law, the buyer assumes ownership and control of the target's privileged communications at closing, unless the parties agree otherwise in the purchase agreement.
But what if your deal is governed by Canadian law? Can you still rely on a "Great Hill clause" to protect your privileged communications? The answer is likely yes, based on some recent judicial developments in Canada. This blog post explores how "Great Hill clauses" may be applied in Canadian M&A transactions and provides some tips and best practices for sellers and buyers alike.
The Canadian Approach to Privileged Communications in M&A Transactions
Unlike Delaware, Canada does not have a uniform rule on how privileged communications are treated in M&A transactions. Rather, the issue may vary depending on the type of transaction (share purchase or asset purchase), the jurisdiction (province or territory), and the specific facts and circumstances of each case. However, some general principles can be derived from the existing case law and commentary.
In a share purchase transaction, where the buyer acquires all or substantially all of the shares of the target company, the buyer will generally assume ownership and control of the target company's privileged communications at closing, unless the parties agree otherwise in the purchase agreement. This is because the target company remains the same legal entity before and after closing, and its rights and obligations are not affected by the change of ownership. Therefore, any privilege that belongs to the target company will also belong to the buyer as its new owner.
In an asset purchase transaction, where the buyer acquires only certain assets and liabilities of the target company, the seller will generally retain ownership and control of its privileged communications, unless the parties agree otherwise in the purchase agreement. This is because the seller remains a separate legal entity from the target company, and its rights and obligations are not transferred to the buyer. Therefore, any privilege that belongs to the seller will also remain with the seller after closing.
However, these general principles are not absolute, and there may be exceptions or variations depending on the context. For example, if the seller and the target company share a common interest or a joint privilege over certain communications, such as deal communications with external counsel, then both parties may have a right to assert or waive privilege over those communications. Alternatively, if the buyer acquires certain assets or liabilities that are subject to litigation or potential claims, then it may have a right to access certain privileged communications that are relevant to those matters.
The Role of "Great Hill Clauses" in Canadian M&A Transactions
Given the uncertainty and complexity of how privileged communications are treated in Canadian M&A transactions, it is advisable for both sellers and buyers to address this issue explicitly in their purchase agreements. This is where "Great Hill clauses" come into play.
A "Great Hill clause" is a contractual provision that allows the seller to retain control over certain pre-closing privileged communications between itself and/or the target company and legal counsel, and prevents the buyer from using those communications in any post-closing litigation against the seller. The purpose of such a clause is to preserve the seller's privilege and confidentiality over sensitive information that may be relevant to potential claims or disputes arising from the transaction.
A "Great Hill clause" typically consists of several components, such as:
- The identification of the privileged communications at issue, such as deal communications and other pre-closing communications between the seller and/or target company and external deal counsel.
- The allocation of control over such communications post-closing, such as sole possession of the privilege by the seller and release or waiver of any joint or common privilege by the target company.
- The prohibition of use by the buyer of those communications in any post-closing dispute against the seller.
- Other additional provisions that may address specific needs or concerns of the parties, such as retention of external deal counsel by the seller, identification and segregation of privileged documents before closing, or clarification of external deal counsel's clients.
The use and effectiveness of "Great Hill clauses" in Canadian M&A transactions have been endorsed by some recent judicial decisions in Ontario and Alberta. In the June 2023 decision of Dente et al. v Delta Plus Group, et al., the Ontario Superior Court of Justice ordered the buyer to return privileged documents to the seller that were inadvertently transferred at closing, and validated the use of contractual provisions to preserve privilege in share purchase transactions. Similarly, in the 2013 decision of NEP Canada ULC v MEC OP LLC, the Alberta Court of Queen's Bench held that privilege belongs to both the seller and the target company unless expressly excluded by contract, and that any pre-closing attorney-client communications are discoverable by both parties.
These decisions suggest that Canadian courts will respect the parties' contractual intentions regarding privileged communications in M&A transactions, and that "Great Hill clauses" can be an effective tool to protect the seller's privilege and prevent the buyer from using it against them. However, caution is still warranted, as Canadian courts have not yet scrutinized an actual "Great Hill clause" and may interpret it differently from U.S. courts. Moreover, there may be other factors or circumstances that may affect the validity or enforceability of such clauses, such as the scope of disclosure obligations, the nature of the claims or disputes, or the possibility of inadvertent waiver of privilege by the seller.
Tips and Best Practices for Sellers and Buyers
If you are a seller or a buyer in an M&A transaction, you should carefully consider how to deal with privileged communications in your purchase agreement, and consult with your legal counsel on how to draft and negotiate a "Great Hill clause" that suits your needs and interests. Here are some tips and best practices to keep in mind:
- For sellers:
- Identify and segregate your privileged communications before closing, and remove them from the target company's servers and records.
- Use a separate email account or channel to communicate with your legal counsel during the course of the deal and after closing, and avoid using the target company's email accounts or systems.
- Include a "Great Hill clause" in your purchase agreement that preserves your privilege over certain pre-closing communications, such as deal communications and other sensitive information.
- Include a "no use" clause that prohibits the buyer from using those communications in any post-closing litigation against you.
- Include a clause that allows you to retain your external deal counsel in any post-closing dispute with the buyer arising from the transaction.
- For buyers:
- Conduct a thorough due diligence on the target company and its assets and liabilities, and request disclosure of any relevant privileged communications that may affect your decision or valuation.
- Include a clause that grants you access to certain privileged communications that you need to manage the operations, assets and liabilities that you acquire at closing, such as litigation or regulatory matters.
- Include a clause that requires the seller to identify and segregate its privileged communications before closing, and to return or destroy any copies that may be transferred to you at closing.
- Include a clause that requires the parties to cooperate and protect each other's privilege over certain pre-closing communications, such as joint defense or common interest communications.
These tips and best practices can reduce the risk of disputes or surprises regarding privileged communications in your M&A transaction and protect your rights and interests as a seller or a buyer.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.