A recent Ont. court decision addressed the issue, but lawyers await more clarity from courts
A legal concept originating in the United States is once again on the minds of Canadian lawyers after an Ontario Superior Court of Justice decision was handed down in June.
Referred to as a Great Hill clause, after the case Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLP that was heard in the Delaware Court of Chancery, the concept deals with protecting privileged communications after a commercial sale has been completed.
Great Hill clauses typically apply to privileged communication over email or other forms of electronic-based messaging that are stored on a company’s servers or are accessible via a company’s accounts. After a new buyer takes possession of a company and its servers after a sale, the question becomes can the buyer rely on the privileged communication that took place between the former owner or owners and their counsel, especially the information relating directly to the sale itself?
To avoid any questions of who is entitled to rely on the privileged communications, parties include Great Hill clauses into sales contracts.
“Some smart deal lawyers came up with an idea to include a provision in the purchase agreement that makes it clear that, after closing, all communications between either the target or the sellers and [the law firm or firms representing them] are going to solely be the property of the sellers or that the seller is going to have the exclusive right to exercise privilege. And neither the buyer nor the target, (which would then be owned by the buyer post-closing) can use the privileged communication as part of a claim against the sellers,” says Chris Sunstrum, a partner in Goodman’s mergers and acquisitions group
In June, Justice Catrina D. Braid of the Ontario Superior Court of Justice, addressed that issue. In presiding over Dente et al. v. Delta Plus Group et al., 2023 ONSC 3376. In a commercial dispute regarding a share purchase agreement, consulting agreements, and events related to those agreements, counsel for the defendants identified 387 documents which may have contained solicitor-client communications between the plaintiffs and their counsel. The parties developed a protocol and retained neutral counsel to review the documents, but then the plaintiffs brought a motion seeking a declaration that these communications were subject to solicitor-client privilege.
The was no Great Hills clause involved anywhere in that case, a fact Justice Braid noted. “Generally, after the sale of a corporation, all documents and materials the corporation owns remains with the corporation. When an owner of a company shares the services of counsel with their company prior to closing, there is a joint privilege. The owner can insert a clause in the share purchase agreement that would leave the former owner in sole possession of the privilege upon closing. When they fail to do so, the prior owner cannot claim privilege over documents as against the new owner, who now owns the documents.”
In making that comment, she cited an earlier Alberta case, NEP Canada ULC v. MEC OP LLC, 2013 ABQB 540, which also called out the lack of a clause which would exclude the buyer of a target from using privileged communications against a seller.
While there were no actual Great Hill clauses in the Ontario or Alberta cases, Sunstrum said they are becoming much more common.
“I’m certainly putting them in agreements that I draft on the sell side where they’re appropriate. And I’m seeing them in more and more agreements where I’m acting on the buy side.”
Unlike some types of contract law, Sunstrum said there are no “magic words” or specific language for Great Hill clauses to be enforceable.
“With that said, they’re all fairly similar because they’re all dealing with the same concept. The key is to make it clear what communications are covered by the clause – generally pre-closing privileged communications that relate in some way to the deal or the negotiation – and then what the relative rights of the parties are to those communications.”
According to Sunstrum, with decisions from Alberta and Ontario, there is a pretty good indication of which way courts will lean when they finally have to adjudicate whether a Great Hill clause is enforceable.
“What we don’t yet have is a case that deals with a specific Great Hill clause applied to a specific-facts scenario, and says that, ‘on these particular facts, this particular clause is enforceable.’ We can certainly draw some preliminary conclusions from the case law in the United States, which is often very influential on Canadian jurisprudence, and the statements that have been made in the two cases in Canada to date.”