Recent Decision Spotlights Privilege Issues in M&A Transactions

Can information a seller shares with counsel on corporate servers during the course of M&A transactions be used against them after closing of the deal? A recent decision by the Ontario Superior Court of Justice underscores the importance of considering solicitor-client privilege when negotiating M&A transactions.

What Happened in the Case

In Dente et al. v. Delta Plus Group et al. (Dente)[1], the Court reviewed and applied key principles governing solicitor-client privilege after the closing of an M&A transaction. The case involved a lawsuit that arose two years after a selling group, the “Dentes”, sold their corporate interests in a couple of target companies (the “Target Companies”) to Delta Plus Group pursuant to a Share Purchase Agreement. During negotiations and preparation of the Share Purchase Agreement, the Dentes retained the services of a solicitor (“M&A counsel”) they had used for years for personal and business matters, though it was not made clear at the time whether that solicitor also represented the Target Companies. Unfortunately, some of their correspondence with M & A counsel occurred and was stored on servers of the Target Companies which, after closing, fell into the control of the Delta Plus Group (the “Buyers”).

Following closing, the Dentes continued to serve as consultants to the Target Companies (retaining email accounts on company servers), and the eventual lawsuit concerned aspects of their service under those agreements as well as others related to the Share Purchase Agreement. The Dentes initially sued both the Buyers and the Target Companies (together, the “Defendants”), and the latter group then brought a counterclaim. At issue was whether communications between the Dentes and M&A counsel on the Target Company servers could be used in the litigation. The Dentes argued that such communications should be privileged and, therefore, could not be used by the Defendant (Buyers) in their defence nor in their counterclaim against the Dentes. As such, they filed a motion seeking a declaration that those communications were protected by solicitor-client privilege.

Loss of Exclusive Privilege

The court ultimately found that some documents left on the Target Company servers gave rise to joint privilege and proceeded to separate documents into different categories: some that were privileged in favour of the Dentes (and were only inadvertently disclosed to the other side), and others that remained privileged in favour of the Target Companies (and, effectively, the Defendants). The decision underscores both the sanctity of solicitor client privilege – that the court would protect it even where it has already been inadvertently disclosed to the other side – as well as the importance of not putting such communications in “harm’s way” by corresponding with M&A counsel privately through personal email and communication channels.

Factors in the Decisions

The court noted that the key issue was whether the M & A counsel represented both the Dentes and the Target Companies during the negotiation and execution of the transaction. If so, then there would be joint solicitor-client privilege over the documents at issue (i.e. with the benefit of joint privilege then rolling over into the control of the Delta Group, or buyers, post-transaction).

The court considered numerous factors, including the fact that the solicitor told the Buyers that he was representing the Dentes and that he could not represent both the sellers and the companies given a certain conflict of interest that arose (i.e. the Target Companies were guarantors to the benefit of the sellers’ trusts). As such, the Court made a key determination that M&A counsel did not represent the Target Companies in the transaction. This weighed significantly into a finding that certain pre-closing documents remained within the exclusive solicitor-client privilege of the Dentes. However, the court was more nuanced on correspondences that occurred post-closing, ascribing joint privilege over such communications, giving both sides equal access in a post-closing dispute.

Key Takeaways from Dente

While in Dente the sellers retained some privilege over pre-transaction documents, the decision could have easily gone the other way and did, in fact, do so on communications arising post-closing. Further, the need to litigate the issues caused unnecessary delays and expense that could have been avoided with proper preparation. As such, parties and counsel should start by being clear from the outset as to who counsel are acting for and to have the documentary record (e.g. retainer agreement, definitive agreements etc.) reflect that understanding. Finally – and perhaps most importantly – parties should always be aware of how, and through what channels, they are corresponding with counsel.?

Should you have any questions about privilege and how such issues might impact you in a potential transaction, a member of our business law group would be happy to discuss.

[1] https://www.canlii.org/en/on/onsc/doc/2023/2023onsc3376/2023onsc3376.html