Protect M&A Privilege: A Founder's Guide to Seller's Rights

The Deal Is Done. Then You Get the Lawsuit.

You’re celebrating the acquisition. The money is in the bank. Then a letter arrives from the buyer’s attorney. It demands a multi-million dollar refund from the escrow for an alleged breach of the reps and warranties. To support their claim, they include a damning exhibit: an email thread between you and your M&A lawyer from three months before the deal closed.

How did they get it? The answer is simple and terrifying: you gave it to them.

When you sell your company, you don’t just hand over the keys to the office and the customer list. By default, you also hand over the company’s attorney-client privilege. This means the buyer, as the new owner, can access nearly all pre-closing communications between you (the seller) and the company’s own legal counsel.

This is not a theoretical "gotcha." It is a standard post-closing legal tactic. Fortunately, you can prevent it.

The Default Trap: Buyers Inherit Your Legal Secrets

The legal logic for this stems from Delaware corporate law, which governs the vast majority of venture-backed startups. Section 259 of the Delaware General Corporation Law (DGCL) states that in a merger, "all property, rights, privileges, powers and franchises" of the original company become the property of the surviving company.

Courts, most famously in the 2013 Delaware case Great Hill Equity Partners v. Pluralsight , have confirmed that "privileges" includes the attorney-client privilege. The court ruled that unless you explicitly contract around it, the privilege transfers with the company.

Access all files held by the law firm that represented the company in the sale. · Take control of all company email servers, laptops, and SaaS accounts (like Slack and Google Workspace) containing your legal discussions. · Waive the privilege on your behalf, even if you object.

Common Mistake #1: Believing "Company Counsel" is "My Counsel"

Founders often have a close, long-term relationship with their corporate law firm. You feel like they are your lawyer. But legally, their client is the corporation itself. As a shareholder, officer, or director, you are a representative of the client, but you are not the client. When the corporation is sold, the new owner gets to be the client and control the relationship with the lawyer.

What Buyers Are Looking For (And Why It Matters)

Buyers don’t dig through your old emails for fun. They are hunting for leverage to claw back a portion of the purchase price, often from the escrow or holdback amount set aside in the deal.

They are specifically searching for "smoking gun" communications that suggest you knew about a problem before the sale that you failed to disclose. Examples include:

Undisclosed Liabilities: An email thread with your lawyer analyzing a potential but-not-yet-filed employee lawsuit. · Product or Tech Weaknesses: A discussion about a known, serious security flaw or your inability to scale a core piece of your tech infrastructure. · Financial Doubts: Your analysis showing that a major customer is a churn risk, contradicting the rosy projections you presented in diligence. · Negotiation Strategy: Your private thoughts on your "walk away" price or weak points you were trying to hide during negotiations.

Finding any of these gives the buyer a powerful weapon to allege fraud or breach of contract and demand a reduction in the sale price.

The Solution: The "Great Hill" Privilege Carve-Out

You can and must prevent the transfer of privilege. The solution is to add a specific "privilege carve-out" provision—often called a "Great Hill clause"—into the definitive purchase or merger agreement. You cannot fix this after the fact.

While the exact language requires careful drafting by your lawyer, a protective clause accomplishes three things:

Defines the Scope: It states that all attorney-client privilege related to the negotiation, drafting, and execution of the M&A transaction itself belongs solely to the sellers and their representative. · Prevents Access: It explicitly prevents the buyer from using or relying on these privileged communications in any post-closing dispute. · Controls the Counsel: It ensures that the law firm that handled the sale cannot be compelled by the buyer to turn over its files related to the deal negotiation. The privilege remains with you, the seller.

Common Mistake #2: Not Putting It in the Agreement

A verbal assurance from the buyer is worthless. A side letter is risky. The privilege carve-out must be included in the binding merger agreement or stock purchase agreement signed by both parties. This is a standard request in modern M&A, and any sophisticated buyer will be familiar with it. If they push back hard, it’s a major red flag that they may be planning a post-closing dispute from the outset.

Your Tactical Playbook for Protecting Privilege

Securing your interests requires more than just a legal clause. It requires disciplined operational hygiene from the moment you begin contemplating a sale.

1. Hire Your Own Counsel

The cleanest approach is for the selling shareholders to retain their own, separate legal counsel to advise them on the transaction. The company can have its own counsel handle its corporate actions. This creates a bright line: your communications with your lawyer are clearly yours, while the company’s communications belong to the company.

2. Practice Strict Communication Hygiene

This is the most common and disastrous founder mistake. Never use a company-owned communication channel to discuss the M&A process.

Email: Do not use your you@company.com email address. Set up a dedicated, personal Gmail or other third-party account for all deal-related correspondence. · Slack/Teams: Do not create a private channel in the corporate Slack to discuss the deal. The buyer will own the entire Slack instance, including all private channels and direct message history. · Computers and Phones: Assume the buyer will image the hard drive of your company-issued laptop. Do not store sensitive deal-related documents or notes on it.

Instruct your lawyers, bankers, and management team to adhere to this policy without exception. Any data residing on company servers will be transferred to the buyer at closing.

3. Insist on the "Great Hill" Clause

Make this a non-negotiable point for your legal team when they review the first draft of the purchase agreement. It’s a standard, market-accepted term. Treat its inclusion as a basic cost of doing the deal.

4. Manage Document Control at Closing

Ensure the closing process includes a clear step for segregating and transferring information. Any privileged communications related to the deal should be explicitly excluded from the assets and data handed over to the buyer. Don't leave your negotiation notes in a folder on the company’s Google Drive.

Nuance: Stock Sales vs. Asset Sales

This privilege issue is most acute in stock sales and mergers , where the entire legal entity of the company is acquired by the buyer. The company continues to exist, just with a new owner.

In an asset sale , the buyer acquires specific assets (like IP, customer contracts) and leaves the corporate "shell" behind with the seller. In this scenario, the seller technically retains control of the shell and its privilege. However, buyers often demand access to certain communications as part of the asset transfer, and sloppy data hygiene can still lead to inadvertent disclosure. The best practice is to always use a privilege carve-out clause and maintain strict communication discipline, regardless of deal structure.

How to Apply This Today

Don’t wait until you’re deep in diligence to think about this. Protecting your privilege starts now.

Talk to Your Lawyer: If you are even thinking about a sale, have a direct conversation with your corporate counsel about who they represent and how you will manage privilege when the time comes. · Audit Your Communications: Look at how your executive team communicates about sensitive topics. Are you using personal Signal threads or company Slack DMs? Change your behavior now. · Add "Privilege Carve-Out" to Your M&A Checklist: Create a checklist of key legal and business points for any future transaction. Make this a permanent, non-negotiable item on that list.

Selling your company is the culmination of years of work. A simple mistake in managing legal privilege can turn that victory into a prolonged and expensive legal battle. Treat it with the seriousness it deserves.