If you sell your company, you’d assume the lawyers who helped you with the deal would still be able to assist you with any issues that might come up after closing, right? Not so fast. The reality may surprise you.
In most mergers, the law firm technically represents the target company rather than the selling stockholders. That company gets merged into the buyer, which means the target company (the “client”) is now a part of the buyer. Therefore, the buyer typically becomes the client at closing, and your lawyers may be prevented from taking any positions adverse to its interests. That means the buyer may have the right to force the selling stockholders to use a different firm after closing, which can place them at an obvious disadvantage in negotiations. Many investors do not see that coming.
Making matters worse, if the buyer becomes the “client” after closing, it may suddenly own rights to some or all of the pre-closing communications with the target’s law firm. That’s definitely not something the average stockholder or manager thinks about when speaking with the attorney.
The general assumption is that you can have candid communications with your lawyer, and the opposing side will never hear anything about it. In the merger context, that assumption may be on shaky ground. The limited case law on this contains a somewhat convoluted analysis that tries to make a distinction between whether pre-closing communications relate to the merger transaction itself or to the general operations of the business, with buyers owning general communications but not communications that are specific to the deal.
The problem is that those issues are heavily intertwined, which makes it pretty hard to accurately predict whether a court would put certain communications in the “general ops” bucket or the “deal” bucket. Also remember that the buyer generally takes all the target’s assets in the merger, including the files and servers on which company emails likely exist. Therefore, even if the buyer cannot get what it’s looking for from the target’s law firm, the correspondence may be readily available to it anyway. F
or all these reasons, you’ll want to think hard about the form of communications you have with your counsel on deal points and may want to pick up the phone rather than emailing.
Our view is that the applicable court decisions we’ve seen come to the wrong outcome on the attorney-client relationship issues in the context of a merger. There are clear problems inherent in concluding that the sell-side law firm effectively switches loyalties at closing. Each party should get the benefit of having access to, and candid communications with, their attorney throughout the entire merger process. It does not seem fundamentally fair that the buyer gets their lawyers for the whole transaction but the sell-side gets thrown into a pool of uncertainty. Once a company has made the decision to be acquired, the stockholders are the parties with the primary economic interest in the deal and with exposure to related liabilities.
Therefore, the sell-side law firm is really representing the stockholders’ interests when negotiating the deal. The target company is just a conduit for all of this and effectively becomes the opposing party upon closing.
Unfortunately, given the current state of the law, there are a few things we would suggest stockholders consider doing when consummating a merger:
- Talk to your lawyers about putting conflict waiver language in the merger agreement.
- Discuss with your lawyers their understanding of who will own communications and what their disclosure obligations may be after closing.
- Discuss communications policies related to what should be in writing, including attorney’s notes. Be careful with written communications that you may not want the buyer to see.
Paul Koenig is a co-founder/managing director of Shareholder Representative Services (www.shareholderrep.com), which serves as a professional shareholder representative following the acquisition of a VC-backed portfolio company. Read his past peHUB posts here.