CLIENT MERGERS/ASSET SALES
[Home] [Table of Contents]
A good
scenario to begin this discussion are the facts from Tekni-Plex, Inc. v. Tang,
674 N.E.2d 663 (N.Y. 1996). A law firm ("M&L") represented
Tekni-Plex, Inc. ("TP") and its owner, Tang, for several years.
It did environmental work for TP, including obtaining certain permits for one of
its machines. Tang decided to sell TP, and M&L represented TP and Tang
in negotiating and closing the sale. According to the agreement, the
buyers formed a shell corporation, and TP was then merged into the shell.
The resulting company was called "Tekni-Plex, Inc." Tang
received $43 million.
When the
buyers discovered that the aforementioned machine was violating environmental
laws, Tekni-Plex, Inc. ("New TP") brought an arbitration against
Tang. M&L appeared for Tang. New TP moved to have M&L
disqualified. New TP claimed that it was a former client of M&L and
that the arbitration involves a matter substantially related to M&L's
earlier representation of TP. The arbitrator believed he had no authority
to disqualify M&L. New TP then brought an injunction action against
M&L, seeking an order removing M&L from the arbitration. What
result? When a former client corporation merges with another corporation,
is the resulting corporation a former client? Would it make a difference
if the transaction was not a merger but, rather, a sale of assets?
The
analysis is basically a Model Rule 1.9(a)(former client/substantial
relationship) analysis. Is the surviving entity a
former client (or never a client)? If the surviving entity is a
"former client," is the current matter substantially related to the
matter the lawyer handled previously? The
answers are not as clear as one would like.
In Tekni-Plex,
The New
York Court of Appeals affirmed the Supreme Court and Appellate
Division holdings that the injunction should issue. It held that
M&L was being adverse to a former client in a matter substantially related
to what the firm had done for the client before the merger. The court
was confronted with an earlier Second Circuit case, which seemed to hold the
contrary, International Electronics Corp. v. Flanzer, 527 F.2d 1288 (2d
Cir. 1975). In Flanzer the court held that the surviving
corporation in a merger is not a former client. The New York court distinguished Flanzer, because
there the lawyer's only involvement with the older corporation was handling the
sale. The New York court said that being involved in arms-length
negotiations with the buyers did not put the lawyer in a position to violate the
company's confidentiality in a later proceeding. The court went on to say
that it was M&L's environmental work, which related to the arbitration, that
made the difference.
Oswall v. Tekni-Plex,
Inc., 691 A.2d 889 (N.J. Super. 1997) involves the same players as those in
the New York Tekni-Plex case. Oswall, a former
employee of Tekni-Plex, sued the company for breach of contract. The
lawyers for Tekni-Plex subpoenaed Tang, the former owner, for a
deposition. M&L attempted to represent Tang at the deposition.
M&L started objecting to questions and instructing Tang not to answer.
The court held that M&L was being adverse to its former client, Tekni-Plex,
and disqualified M&L. The court cited the reasoning of the New York
Court of Appeals in the above opinion.
Data
Trace Info. Services, LLC v. Kopchak, 2006 U.S. Dist. LEXIS 3467 (D.N.J.
Jan. 26, 2006). Co. A. merged into
Co. B. Co. B is the plaintiff in
this action. Co. B moved to
disqualify the lawyer for a third-party witness in this action because the
lawyer had represented Co. A before the merger.
The court, in this brief opinion, affirmed the magistrate’s order
disqualifying the lawyer because the lawyer was being adverse to a former client
on a matter substantially related to this action.
The opinion, being largely about procedure, does not say what the
relationship was or what was adverse about the representation of the witness. But, the court did buy into the notion that Co. B inherited
Co. A’s “privilege,” citing Oswall, just above.
Russell-Stanley
Holdings, Inc. v. Buonanno, 210 F. Supp. 2d 395 (S.D.N.Y.
2002).
Russell-Stanley (“RS”) purchased all of Buonanno’s stock in New
England Container (“NEC”). Edwards & Angell (“E&A”) represented Buonanno in
that transaction. E&A had
represented Buonanno and NEC on various matters for several years, including
environmental matters. After the
sale Buonanno remained an employee of NEC and continued to use E&A for
environmental matters. E&A did
no work for RS directly. RS asked
E&A to stop representing NEC and then sued Buonanno, claiming he had made
misrepresentations about environmental matters.
E&A seeks to represent Buonanno in the litigation.
RS moved to disqualify E&A. The
court denied the motion, relying on the fact that E&A would have learned
nothing to prejudice RS in representing Buonanno and NEC, before and after the
sale. The court distinguished Tekni-Plex,
Inc. v. Tang, 674 N.E.2d 663 (N.Y. 1996), as follows:
In that case, it was clear that the law firm represented exclusively
the company regarding environmental compliance matters that were related to
the later arbitration, of which there was the potential to use the company's
attorney client information, to which the defendant there had not necessarily
been privy.
In Ali v. American Seafoods Co., LLC, 2006 U.S. Dist. LEXIS 29880 (W.D.
Wash. May 15, 2006) the LLC moved to disqualify the other lawyers. The
other lawyers claim that when they had done work for the LLC, it was a different
company. The court granted the motion, holding that the new company should
be treated the same as the old company because the personnel, assets,
liabilities, and procedures had survived the reorganization largely intact.
Weasler
v. Weasler Engineering, Inc., 596 N.W.2d 501 (Wis. App. 1999), involved the
same merger structure as that in the Tekni-Plex cases. The
Wisconsin court cited the New York Court of Appeals decision and reached the
same result. A case that pre-dated Tekni-Plex that reached the same
result is Thompson US, Inc. v. Gosnell, 581 N.Y.S.2d 764 (N.Y. App.
1992). A similar result occurred in Exterior
Systems, Inc. v. Noble Composites, Inc., 175 F. Supp. 2d 1112 (N.D.
Ind. 2001). Gross
v. SES Americom, Inc., 307 F. Supp. 2d 719 (D. Md. 2004),
takes a contrary approach and follows International Electronics Corp. v. Flanzer, 527 F.2d 1288 (2d
Cir. 1975).
ebix.com,
Inc. v. McCracken, 312 F. Supp. 2d 82 (D. Mass. 2004).
Pursuant to an acquisition, Company A purchased and merged with Company
B, forming new Company C. Sometime
later, Company C sued the sellers of Company B for misappropriating trade
secrets and related causes of action. The
law firm representing the defendants formerly had represented Company B on a
range of matters. The plaintiff
moved to disqualify the defendants’ law firm, claiming those matters were
substantially related to the issues in this case.
Evidently, the court and the parties assumed that, because of the merger,
new Company C was a “former client” of the defendants’ law firm.
Thus, the disqualification issue turned solely on whether the
representations were substantially related.
That analysis is lengthy but routine, and little would be accomplished by
sorting it all out here.
In In Re: Cap Rock
Elec. Coop., Inc., 35 S.W.3d 222 (Tex. App. 2000), a lawyer attempted
to be adverse to an entity that had combined with his former client. The
combination had some characteristics of a merger and other characteristics of an
asset sale. The court first held that the combination was a merger, rather
than an asset sale. But, the court held that the new matter was not
substantially related to what the lawyer had done for the entity and affirmed
the lower court's denial of disqualification. That is easy enough to
follow. However, after finding that the combination was a merger, the
court embarked on an unnecessary, and confusing, analysis comparing the case to FDIC v.
Amundson, 682 F. Supp. 981 (D. Minn. 1988). In Amundson the
court held that the former lawyer for a failed thrift could be adverse to the
estate of the thrift, because the thrift was out of business with no hope of
reviving. The Texas court said that in Cap Rock the entity was
also dead with no remaining existence or business. What the court seems to
be implying with that last point is that in the case of any merger, the
predecessor entity is dead, with no hopes of going forward, and that the
surviving entity should not be treated as a former client. (Or, at least
that is the way we read it.)
Cites Cap Rock.
L Greene’s Pressure Treating & Rentals, Inc. v. Fulbright &
Jaworski, L.L.P., 178 S.W.3d 40 (Tex. App. 2005).
Co. A retained Fulbright to opine that its process (“Process”) did
not infringe a patent (“Patent”) held by Co. B.
Fulbright wrote the opinion. Co.
C acquired Co. A and used the Process. Co.
C then sold 5% of its assets to Co. D, including the Process, which Co. D then
used. Co. B, holder of the Patent,
then sued Co. D for infringement of the Patent.
Surprise: Co. B’s law firm is Fulbright, author of the aforesaid non-infringement
opinion. The case settled. Then Co. D sued Fulbright for breach of fiduciary duty,
claiming that when it purchased the Process, it purchased Co. A’s relationship
with Fulbright. The trial court
granted Fulbright summary judgment. In
this opinion the appellate court affirmed.
The court held that because Co. D obtained the Process in an asset sale,
as opposed to a merger, Co. D did not stand in the shoes of Co. A, with regard
to Co. A’s relationship with Fulbright. The
court relied upon In re Cap Rock, discussed just above.
United
States v. Nabisco, Inc., 117 F.R.D. 40 (E.D.N.Y.
1987). A law firm represented Standard Brands. Standard Brands
merged into Nabisco. The law firm tried to sue Nabisco in another,
unrelated, matter. Nabisco moved to disqualify the firm in the latter
matter. The granted the motion, because, by virtue of the merger, the law
firm now represents Nabisco and cannot be adverse to Nabisco in an unrelated
matter.
RAG Am. Coal Co. v. Cyprus Amax Minerals Co.,
750 N.Y.S.2d 284 (N.Y.
App. 2002).
Company A was the parent company. Company
B was a subsidiary of A. Company C
was a subsidiary of B. Lawyer
worked in the law department of A, but all his work was for C.
Company X purchased C from B. As
part of the bargain Lawyer went from A to X, where he became General Counsel of
X. X sued B for breach of contract.
B moved to disqualify Lawyer. The
court denied the motion, saying that because Lawyer’s move was part of the
deal, A could not expect Lawyer not to use all he had learned while with A and
working on C’s matters.
Home Ventilating
Institute, Inc. v. Air Movement & Control Ass’n. Int’l., Inc., 2004
U.S. Dist. LEXIS 17242 (N.D. Ill. Aug. 30, 2004). A has sued B, in part, for a declaratory judgment that A and
B were separate entities and had not been subject to a “de facto” merger, as
claimed by B. A’s lawyer in this
case, X, has represented A for many years.
X admits that he also represented B in the past, but on narrow and
unrelated matters. B moved to
disqualify X. The court first held
that X would survive the “substantial relationship” test as to the prior
representation of B. The court then
addressed the knotty issue of whether X still, in effect, represents B because
of B’s position that A is still part of B.
The court noted that the relationship of A to B was one of the
substantive issues in the case. The
court held that this chicken-before-the-egg issue required that it be resolved
in favor of disqualification.
Occidental Hotels Mgm’t. B.V. vs. Operadora Intercontinental de
Resorts & Hotels, S.A., 440 F. Supp. 2d 303 (S.D.N.Y. 2006). For several years Lawyer, as
outside counsel, and later as inside counsel, represented Parent and Sub on a
number of matters. At one point
Parent sold Sub to Buyer. Buyer
then sued Parent under indemnification clauses in the purchase agreement.
Prior to the sale Lawyer had worked on the matters that were the subjects
of the indemnification claims. Lawyer
is now with Law Firm, which is defending Parent in this action.
Because of Lawyer’s presence in Law Firm, Buyer moved to disqualify
Lawyer and Law Firm. In this
opinion the magistrate judge denied the motion.
The court said it was the client (Sub), and not the lawyer, that had
changed sides. Moreover, the court
said that Buyer could never have had an expectation that Lawyer would not have
told his client Parent everything Lawyer knew about his client Sub.
The court distinguished Tekni-Plex, Inc. v. Meyner & Landis, 674 N.Y.S.2d 954 (N.Y.
1996), in which a lawyer had been disqualified. There the lawyer had not represented both the owner and the
owner’s company in the matters in question prior to the owner’s sale of the
company.
In Waid v. Eighth Judicial Dist. Ct., 119 P.3d 1219 (Nev. 2005), the
court held that the lawyer for one entity is deemed lawyer for its successors.
Intelsat, Ltd. v. Int’l.
Telecomm. Satellite Org., 2007 U.S. Dist. LEXIS 23113 (S.D.N.Y. March 16,
2007). The plaintiff and defendant,
in a restructuring, came from a common parent.
In the restructuring the plaintiff received almost all the assets,
operations, and personnel. The
defendant received very few assets or operations and just a few employees.
The defendant moved to disqualify plaintiff’s law firm because the law
firm had previously represented the parent.
The defendant argued that it was, in effect, a former client of the
plaintiff’s law firm. In denying
the motion the court reasoned that, given the result of the restructuring, the
former client was really the plaintiff.
What About Pure
Asset Sales?
In the following
cases the transaction was the sale of all, or substantially all, the client's
assets. The issue was whether the law firm for the seller could be adverse
to the purchaser. In each case the court held the law firm could be
adverse to the purchaser. Telectronics Proprietary, Ltd. v. Medtronic,
Inc., 836 F.2d 1332 (Fed. Cir.
1988); In re Yarn Processing Patent Validity Litigation, 530 F.2d
83 (5th Cir. 1976); SMI Industries Canada, Ltd. v. Caelter
Industries, Inc., 586 F. Supp. 808 (N.D.N.Y. 1984).
Telectronics and Yarn Processing involved the transfer of
intellectual property.
Graco Children's Prods. v. Regalo Int'l LLC, 1999 U.S. Dist. LEXIS 11392
(E.D. Pa. 1999) held that the transfer of assets, including patents, did empower
the transferee to disqualify a lawyer on the other side, who had previously
represented the transferor. The court cited several cases involving the
attorney-client privilege. The court did not cite any cases involving
disqualification, including any of those in the preceding paragraph.
Dyntel Corp. v. Ebner, 120 F.3d 488 (4th Cir.
1997). Cincinnati Bell sold a subsidiary to DynCorp. After the sale,
a lawyer at Cincinnati Bell attempted to be adverse to the subsidiary in an
arbitration. DynCorp sued to enjoin the lawyer from handling the
arbitration, because she had earlier represented the subsidiary. The
Fourth Circuit affirmed an order dismissing the claim, citing Flanzer.
The court said that the lawyer did not currently represent the subsidiary and
relied in part on the fact that DynCorp had made no showing that the lawyer
would use the subsidiary's confidences. In G.F.
Industries v. American Brands, Inc., 245 N.J.
Super. 8 (N.J. App. 1990), a case very similar to Dyntel, the court held
that the firm had to be disqualified because it had been privy to much
confidential information of the sold entity.
San Diego Unified Port District v. Superior Court,
2004 Cal. App. LEXIS 4818 (Cal. App. May 20, 2004).
Law Firm represented the Port District (“PD”).
The legislature then created the Airport Authority (“AA”), which was
to take over the airport then owned by PD.
A “core group” of PD employees went from the PD to the AA.
For a time Law Firm represented both PD and AA.
After Law Firm stopped representing PD, it filed a lawsuit against PD on
behalf of AA involving some real estate about which Law Firm had consulted PD
during the earlier representation. PD
moved to disqualify Law Firm. Law
Firm responded that whatever information it had about PD would have passed from
PD to AA when the PD employees went to AA.
Thus, the substantial relationship rationale, as it relates to
confidences, should not apply. The
court disagreed and ruled the firm should be disqualified.
[The opinion also refers to a “duty of loyalty” to former clients.
However, the cases it cites on loyalty do not really establish that
loyalty is an issue in former client situations.
The only focus should be confidentiality.
If a lawyer had a duty of loyalty to former clients, then a lawyer could
never be adverse to a former client.]
Scher v. Slater Entertainment, LLC, 2006 U.S. Dist. LEXIS 44186 (D.N.J.
June 26, 2006). Plaintiff was
assigned Company A’ claim against Company B.
This is Plaintiff’s suit against B on the assigned claim.
B’s counsel in this case, Law Firm, previously represented A.
Plaintiff moved to disqualify Law Firm in this case.
Plaintiff argued that A’s assignment included the right to assert A’s
conflict-of-interest claim against Law Firm.
The court disagreed and denied the motion. The court distinguished cases such as Oswall v.
Tekni-Plex, Inc., 691 A.2d 889 (N.J. Super. 1997), in which the complaining
party had acquired ownership and control of an entire enterprise.
In that case the purchaser inherited the seller’s right to object to
its lawyer’s conflict.
Asset Sale;
What Happens to Privilege? Postorivo
v. AG Paintball Holdings, Inc., 2008 WL 343856 (Del. Ch. Feb. 7, 2008).
Plaintiff sold many of its assets to Defendant, but retained some.
This suit arises from that transaction.
This opinion deals with a discovery dispute and the extent to which the
attorney-client privilege of Plaintiff passes with the assets to Defendant.
We will not discuss the case in any detail, in part because the asset
purchase agreement dealt with some of the issues, and the parties agreed to much
of what the court ruled. The only
disputed issue was whether Plaintiff retained the privilege as to assets it
retained, and the court ruled that it did.
The court noted the relevance of Tekni-Plex, Inc. v. Tang, 674
N.E.2d 663 (N.Y. 1996), which is a leading case on client mergers and lawyer
disqualification.
[Home] [Table of Contents]
[Top of Page]
Freivogel on Conflicts