The purpose of this short blog post is to identify key decisions that are merely a helpful starting point in an analysis of whether or not the attorney/client privilege was preserved by the seller of a company post-closing, depending on whether the transaction was a sale of assets, or a statutory merger, or some variation.

The recent Superior Court decision in Serviz, Inc. v. ServizMaster Co., LLC, et al., C.A. No. N20C-03-070-PRW-CCLD (Del. Super. Dec. 6, 2021), considered a post-closing assertion of a privilege over attorney/client communications, involving the sale of a server, among other assets, pursuant to an asset purchase agreement.  There are other important details that are necessary to an understanding of the case, but the purpose of this short blog post is only to identify a few key cases to begin one’s research on this topic.  This recent case follows the seminal decision in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, C.A. No. 7906-CS (Del. Ch. Nov. 15, 2013), which found that in connection with a statutory merger under 8 Del. C. § 259, absent an express reservation by agreement, all privileges are property of the surviving corporation.  This contrasted with an earlier Chancery decision which reached an opposite conclusion in connection with an asset sale.  See Postorivo v. AG Paintball Holdings, Inc., C.A. No. 2991-VCP (Del. Ch. Feb. 7, 2008).

Of course, there are other decisions that need to be included in any complete analysis of this topic, and the specific facts of any situation may be outcome-determinative, but for selfish purposes I wanted to make these three cases easier to find in one place, in the event I ever needed to embark on an extended analysis of the titular topic.

Applying a contractual fee-shifting provision when it is not clear which party prevailed, is a topic that does not benefit from an extensive body of case law, relatively speaking. The recent Court of Chancery decision in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, C.A. No. 7906-VCG (Del. Ch. Dec. 31, 2020), provides an additional source of authority for resolving this issue of outsized importance to lawyers and clients alike.  See Slip op. at pages 15 and 16.

The court also addressed when an “ordinary” contractual indemnification provision might allow for first-party claims for fee shifting, and refers to the recent Chancery decision in International Rail Partners, highlighted on these pages, to explain that only when a contract explicitly provides for first-party claims in an ordinary or “bilateral commercial” contractual indemnification provision will it be deemed to cover fee shifting–as compared to governing documents of a company or “constitutive business entity documents”, such as an LLC agreement, that provide for advancement and indemnification provisions.  See Slip op. at 11 to 13.

In this matter, which was also the subject of many other Chancery decisions, some of which have been highlighted on these pages, the court observed that over eight years of hotly contested litigation the parties incurred collectively about $60 million in legal fees.

Over $122 million in damages was sought, but the plaintiffs were only awarded about $212,000.

The court provides sound reasoning to explain why there was no clear victor in this litigation and for those and related reasons, the court declined to award fees to either party.

Editor’s note: There is no typo in the name of the defendant above. The correct designation for the defendant entity is: LLLP.

A recent Delaware Court of Chancery decision is notable for its explanation of the basic law of damages for contract and fraud claims, as well as cautioning that a damage expert’s estimate of damages needs to correspond to each of the counts in the complaint.

In Great Hill Equity Partners IV, LP, v. SIG Growth Equity Fund I, LLLP, C.A. No. 7906-VCG (Del. Ch. Feb. 27, 2020), the court discussed the damages aspect of this bifurcated case in which liability was determined in a prior post-trial memorandum opinion now known as Great Hill I. See Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 2018 WL 6311829 (Del. Ch. Dec. 3, 2018). That decision was highighted on these pages, as were several other prior rulings over the last few years in this long-running matter.

Brief Overview:

This case involved claims by the buyer of a company that the seller engaged in fraud and breach of contract regarding the sale.

Great Hill I found liability for only a few of the many claims in the complaint. The current decision noted that the damage expert prepared a report prior to the trial–but did not update it after the court’s ruling on liability and prior to the oral argument for the ruling on damages. See pages 44-45 and footnote 227.

The plaintiffs sought over $100 million in damages but were awarded less than $500 thousand in damages.

Highlights of Key Principles:

  • One of the lessons to be learned from this 65-page opinion is that a damage expert needs to allocate damages to correspond to each claim in the complaint–or acknowledge which counts have overlapping damages. See pages 55 to 56.
  • The court provides a useful recitation of the law of damages in Delaware for fraud and contract claims. See page 49–50; and footnote 239.
  • The law in Delaware is that the estimate of damages need not be proven with mathematical certainty as long as the court has a basis to determine a responsible estimate. See pages 53 to 55.
  • Notably, damages cannot be based on speculation, however. See footnotes 254-258, and accompanying text.
  • The quantum of proof needed to show that damages exist, is higher than the proof needed to establish the amount of damages.

A common theme in cases before the Delaware Court of Chancery involves a buyer and a seller of a business disagreeing about some aspect of the deal.  So it was in the matter of Great Hill Equity Partners IV, L.P. v. SIG Growth Equity Fund I, LLLP, C.A. No. 7906-VCG (Del. Ch. Dec. 3, 2018).

This opinion weighs in at 153-pages and provides extensive factual details especially in the first 90-pages.  There were several prior decisions in this case highlighted on these pages, that provide more background information. 

Key Issues:

The key issues in this post-trial decision relate to whether fraud was proven, and whether damages were established in an amount that exceeded the cap on indemnification claims provided in the agreement of the parties.  In addition to allegations of breach of the representations and warranties in the agreement, the case included allegations of fraud, primarily relating to the knowledge of the sellers regarding excessive chargebacks that endangered the business model of the seller.

The legal analysis begins with a review of the claims for indemnification, as well as the argument that due to alleged fraud, the damages should not be limited to the escrow funds established by the merger agreement.  See page 91.

Key Takeaways:

·     Notably, the court explains that in Delaware the elements of fraud and “fraud in the inducement” are the same.  The court expounds at length on the various nuances and subtleties of such claims.  See Slip op. at 93 to 97.  The court applies those elements and nuances of the claims in an analysis that extends from page 97 to page 134.

·     A thorough analysis of the indemnification claims begins at page 134, and the key holdings on the indemnification claims are found at pages 147 to 150.

·     Although many indemnification claims and merger agreements have common themes, naturally their precise terms differ.  Many indemnification provisions have a cap on damages related to those claims.

Highlights of Court’s Holdings:

In this case, the court read the indemnification provisions to provide exclusive remedies only for specific types of claims, but the clause excluded damages based on fraud, for which the agreement did not provide a cap or limitation.  That is, the court explained that when the contract is viewed as a whole, the indemnification language involved exempts fraudsters from the benefits of the negotiated limits on liability.  See page 146 (emphasis on the word “fraudsters” in original).

The court also explained that the indemnification provision was part of a bargained-for liability structure that was intended to limit losses only from breaches of representations and warranties, that would be paid for from a fund that was created from the sale proceeds.

Damages for fraud were not limited to those referenced in the indemnification clause.  The court explained that this exclusion in the indemnification clause allowed an action to be brought against tortfeasers for damages without the limitations of the indemnification clause.  See pages 149 to 150.

SUPPLEMENT: In a recent bench ruling, the Court rejected an argument that the indemnification clause could be used as a broad liability cap, such as for a claim that the payment provision of an agreement of sale was breached–as opposed to a breach of the representations and warranties clause. See Glidepath, Ltd. v. Beumer Corp., C.A. No. 12220-VCL (Del. Ch. Nov. 26, 2018)(Transcript at 4-6). The court referred to the Curo case in the transcript ruling. The advancement aspects of that case were highlighted on these pages. (Yours truly represents Glidepath, Ltd. in a pending earn-out matter.)

A recent short letter ruling by the Delaware Court of Chancery provides a useful tool for the toolbox of commercial and corporate litigators regarding pre-trial arguments to exclude the testimony of an expert who has prepared a report, even though in the Court of Chancery motions in limine to obtain pre-trial rulings on such evidentiary issues are not as meaningful as they would be for a jury trial. Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, C.A. No. 7906-VCG (Del. Ch. Nov. 13, 2017). See also prior decisions in this litigation that have been highlighted on these pages for more background details.

Overview: A motion in limine was denied without prejudice to object at trial to exclude consideration of expert evidence on two issues: (1) whether the expert, who relied on a recitation of facts upon which his opinion was based, should have been precluded from testifying about the facts which allegedly were “cherry-picked and self-serving.”  The court determined that it was able to separate the testimony at trial that was based on second-hand comments — as opposed to first-hand facts.  In addition, the court reasoned that the expert would be subject to cross-examination, where any deficiencies or any inaccuracies on the facts relied upon for the expert opinion can be scrutinized.

The second issue is whether the expert should be precluded from opining on subjective knowledge or intent of individuals that would be outside the scope of the area of expertise of the expert. The court concluded the risk of that danger could be dealt with by objections at trial.

The court relied on Delaware Rule of Evidence 702 which requires that expert opinion be based, among other things, on “sufficient facts or data . . ..” The court also relied on precedent for the view that subjective testimony about the subjective intent of a plaintiff regarding damages is not admissible as expert testimony under DRE 702. See Hoechst Celanse Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 1994 WL 721624 at *1 (Del. Ch. Apr. 20, 1994).

Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, C.A. No. 7906-VCG (Nov. 26, 2014).  This Delaware Court of Chancery decision addresses post-merger claims of indemnification and fraud regarding familiar allegations that the company purchased was not what it was believed to be by the purchasers.

The earlier Chancery opinion in this case decided in 2013 addressed an important issue for those preparing merger agreements because it held that the merger agreement did not provide that pre-merger attorney-client communications were excluded in the assets purchased by the plaintiffs.  Thus, in that prior opinion, the Court of Chancery held that pursuant to Section 259 of the Delaware General Corporation Law all assets, rights, privileges and powers shall be the property of the surviving corporation in a merger.  Therefore, the ownership of the pre-merger communications between the seller and their lawyers passed to the surviving entity following the merger.

That prior ruling put the defendants in this case (the sellers) in the unenviable position of giving the plaintiffs access to the privileged documents involving the merger to use in connection with drafting their amended complaint in this case.  See Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155, 156 (Del. Ch. 2013).

As the court is wont to do, this opinion features a comprehensive recitation of the factual background and the allegations prior to an analysis of the standard of review and the legal discussion.  The first 49 pages of the 76-page decision described the factual background, the allegations and the procedural posture on this motion to dismiss pursuant to 12(b)(6).

The court reviewed in detail the heightened pleading standard for fraud claims pursuant to Rule 9(b).

The court also discussed the similarity between claims of aiding and abetting a breach of fiduciary duty, and civil conspiracy claims.  See footnote 231.

There was also a useful discussion of a claim for unjust enrichment which first requires a determination that no contract governing the relationship of the parties already exists.  Although, the court acknowledged that in some situations both a breach of contract and an unjust enrichment claim may survive a motion to dismiss when pled as alternative theories of recovery.  See footnote 259.

Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, C.A. No. 7906-CS (Del. Ch. Nov. 15, 2013).

Issue Addressed:  In an issue of first impression, the Court of Chancery interpreted DGCL Section 259 to grant the ownership of pre-merger attorney-client communications to the  buyer of the corporation.  The issue arose because pre-merger communications between seller’s counsel and the acquired company were found on the computers of the acquired company after the merger.  The court determined that because it was not expressly addressed otherwise in the applicable agreements, the attorney-client privilege passed to the surviving corporation in the merger as a matter of law under Section 259 of the DGCL.

Practice Pointer: One obvious result of this decision is that drafters of merger agreements  will need to explicitly address the issue of who “owns” the attorney-client privilege to the extent that pre-merger or pre-acquisition attorney-client communications with the acquired entity become an issue in post-merger litigation.

As the court often does, regarding a matter of first impression, it reviewed the leading treatises on Delaware corporate law and corporation law in general to conclude that the issue had not previously been resolved.  See footnote 6.  Although DGCL Section 259 applies to mergers, the statute uses the broadest possible language to include all privileges of the constituent corporations passed to the surviving corporation in a merger.

Careful attorneys will scrutinize this opinion for its insights regarding other business combinations in addition to statutory mergers.  See footnotes 29 through 31 regarding articles with practice commentary.

This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

The Delaware Chancery Court recently ruled that Wayfair Inc.’s exculpation clause shields its board from a  pension fund’s derivative suit that accuses the directors of faithlessly selling a big stake in the online home products retailer too cheaply in order to fund its survival during a feared Covid-19 “economic maelstrom,” in Equity-League Pension Trust Fund v. Great Hill Partners L.P,. et al., No. 2020-0992-SG, opinion issued, (Del. Ch. Nov. 23, 2021).

In his November 23 opinion granting the board’s dismissal motion, Vice Chancellor Sam Glasscock said plaintiff made no pre-suit demand on Wayfair’s board to sue the directors for allegedly letting themselves be panicked into wasting corporate assets on a bargain-priced $535 million in convertible notes in a corporate insider-backed stock sale.   Therefore, he said, Equity-League Pension Trust Fund was required to prove at least five of the nine board members could not objectively review the charges due to conflict of interest, and it was unable to do that.

Since four directors “participated” in the buy-side of the transaction, plaintiff needed to identify only one more conflicted board member from Wayfair’s three-director audit and deal review committee – a focal point of the pre-suit demand battle – to tip the balance in its favor, the court said, but it failed to show that any of them:

  • Received a material personal benefit from the alleged misconduct,
  • Faces a substantial likelihood of liability on any of the claims that would be the subject of the suit, or
  • Lacks independence from someone who got a material personal benefit from the alleged misconduct.

The task of showing those independent directors would be swayed by the threat of legal liability was made significantly more difficult by Wayfair’s exculpation provision which shielded the directors from money damages for ordinary breaches of duty, forcing the plaintiff to show their conduct demonstrated bad faith or disloyalty.

COVID debt concern

Underscoring the importance of the ruling for corporate law specialists, the vice chancellor wrote that, “The decision if, how and when to take on company debt is a quintessential function of the board of directors…and the board of directors approved the transaction at a time of marked market turmoil and general uncertainty in the retail sales business, which is Wayfair’s business, resulting from the onset of the COVID-19 pandemic.”  He noted that companies raised approximately the same amount in convertible debt financings in the second quarter of 2020 as they had during all of 2019.


Wayfair had expanded significantly since its founding in 2002, employed nearly 17,000 full-time employees and generated over $9 billion in annual net revenue but failed to achieve profitability by 2020 despite a series of cost-cutting measures.  Nevertheless, the company’s financial forecasts, which reflected these recent modifications to its operations, projected optimistic results over the next six years even under the worst-case scenario forecast.

But these forecasts did not account for a global pandemic. On February 27, 2020, a week after Wayfair management presented the optimistic forecast to the board, the Dow Jones Industrial Average suffered its largest ever one-day decline and Wayfair’s stock price fell from over $72.50 per share on February 24, 2020 to $23.52 per share on March 19, 2020.

“Amid this economic maelstrom, Wayfair began negotiating a private investment in public equity transaction to raise $500 million through the issuance and sale of convertible notes, which culminated in the transaction;” the court said.

The pension fund’s suit charged that the directors breached their fiduciary duty by rubber-stamping a transaction that got too little for the company’s equity in a sale influenced by four directors with connections to the investors who were the convertible debt stock buyers.

The tipping point

Plaintiff contends the three audit committee directors face liability for failing to properly assess the value of the deal but it offers none of the particular pleadings needed to support its allegations and none of the necessary bad faith “intentional misconduct”, the vice chancellor said in his dismissal ruling.

“Importantly, where (as here) there is no adequate pleading of conflicted interests or lack of independence on the part of the [members of the Audit Committee], the scienter requirement compels that a finding of bad faith should be reserved for situations where the nature of [the Audit Committee members’] action[s] can in no way be understood as in the corporate interest,” the vice chancellor said, citing In re USG Corp. S’holder Litig., 2020 WL 5126671, at *29 (Del. Ch. Aug. 31, 2020) (quoting In re Saba Software, Inc. S’holder Litig., 2017 WL 1201108, at *20 (Del. Ch. Mar. 31, 2017).  “Thus conceived, bad faith is similar to the much older fiduciary prohibition of waste, and like waste, is a rara avis,”he said quoting In re Chelsea Therapeutics Int’l Ltd. S’holders Litig., 2016 WL 3044721, at *1 (Del. Ch. May 20, 2016).

“We don’t care about the risks”?

Plaintiff claims the audit committee’s review of the deal was too short, too shallow and too dismissive of the risks to satisfy the its duty to the shareholders, but the vice chancellor said the record shows that the committee:

  • Received in advance a summary of the process by which the transaction was identified and negotiated,
  • Knew there were four directors participating on the buy side, and
  • Even if it failed to be fully informed, was at most liable for a breach of duty of care (which the exculpation clause protects against) –- not bad faith.

Therefore, a majority of directors were not disqualified from considering the demand and the motion-to-dismiss is granted, the court explained.