Understanding Privilege In M&A Transactions–Safeguarding Seller Interests
Understanding privilege in M&A transactions is crucial for protecting the seller’s interests. When we talk about privilege, we refer to the seller’s communications with their legal counsel.
Understanding privilege in M&A transactions is crucial for protecting the seller’s interests. When we talk about privilege, we refer to the seller’s communications with their legal counsel. During an M&A deal, you will need expert and accurate legal advice to ensure it progresses without hurdles.
However, you’ll also want assurance that the information revealed to your legal advisors will not reach the buyer. Many sellers make the crucial mistake of assuming client-attorney privilege. However, considering the company you’re selling is a separate entity, you’ll need to protect that privilege.
Remember that according to the law, the company being sold owns the privilege. Once the buyer completes the sale and becomes the new owner, they assume privilege. As a result, they can access the confidential information shared with the legal counsel.
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Why Privilege Ownership Can Be a Problem?
The default rule or “common-interest privilege” is that all information involving the target company belongs to the company, not the shareholders. This law is applicable unless you, the seller, enter into a contract with the legal team, specifically preventing them from sharing information.
Without this covenant in the legal contract, after the M&A deal closes, the buyer can access the data. Using the information, they can file post-closing disputes against you. This is why sellers must take the appropriate steps to safeguard their interests. Here, the Great Hill Clause comes in.
The Great Hill Clause results from a 2013 ruling the Delaware Court of Chancery made. According to this ruling, the buyer gets ownership and control over all privileged communication regarding the target company. Once the deal closes, all the data automatically reverts to the new owners.
Aside from communications with the legal team, the law can apply to other entities involved in the sale. These entities can include accountants, investment bankers, or other people. However, the seller can prevent this from happening by including a special clause in the purchase agreement.
You’ll clearly outline the rules regarding the privileges for the target company’s seller shareholders and the buyer after the closing.
Understanding Privilege in M&A Transactions – Factors to Keep in Mind
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