Tekni-Plex, Inc. v. Meyner and Landis, 89 N.Y.2d 123 (1996)
When a corporation is acquired, the control of the attorney-client privilege transfers to the new management regarding general business operations, but not necessarily regarding communications about the acquisition itself if the parties contemplated adverse interests in post-acquisition disputes.
Summary
Tekni-Plex, Inc. (new Tekni-Plex) sued its former sole shareholder, Tang, alleging breaches of warranties in the merger agreement when Tang sold the company. Tang retained Meyner and Landis (M&L), who had been Tekni-Plex’s counsel for many years, including on environmental compliance matters now at issue. New Tekni-Plex sought to disqualify M&L and prevent them from disclosing privileged information. The court held that M&L should be disqualified due to their prior representation of Tekni-Plex, and that the attorney-client privilege regarding general business operations transferred to new Tekni-Plex. However, communications specifically about the merger remained under Tang’s control.
Facts
Tang was the sole shareholder of Tekni-Plex (old Tekni-Plex). M&L represented old Tekni-Plex for over 20 years, including on environmental compliance matters. In 1994, Tang sold Tekni-Plex to Acquisition, a shell corporation, in a merger. The merger agreement contained warranties regarding environmental compliance, and provided for indemnification. After the acquisition, Acquisition became “Tekni-Plex, Inc.” (new Tekni-Plex). New Tekni-Plex sued Tang, alleging breaches of the environmental warranties, claiming Tang misrepresented compliance with environmental laws, specifically regarding VOC emissions from a laminator machine.
Procedural History
New Tekni-Plex initiated arbitration proceedings against Tang, who retained M&L as his counsel. New Tekni-Plex moved to disqualify M&L. After the arbitrator declined to rule on the motion, New Tekni-Plex filed suit in New York Supreme Court to disqualify M&L, enjoin them from representing Tang and disclosing confidential information, and compel return of old Tekni-Plex files. The Supreme Court granted the motion, disqualifying M&L. The Appellate Division affirmed. The New York Court of Appeals modified the ruling.
Issue(s)
1. Whether M&L should be disqualified from representing Tang in the arbitration given their prior representation of old Tekni-Plex?
2. Whether the attorney-client privilege regarding pre-merger communications between old Tekni-Plex and M&L passed to new Tekni-Plex?
Holding
1. Yes, because M&L’s prior representation of old Tekni-Plex on environmental compliance matters, which are substantially related to the current dispute, creates a conflict of interest.
2. No, in part. The attorney-client privilege regarding general business operations transferred to new Tekni-Plex, but the privilege regarding communications pertaining specifically to the merger negotiations remained with Tang.
Court’s Reasoning
The Court of Appeals applied DR 5-108 (A) (1) of the Code of Professional Responsibility, which prohibits attorneys from representing interests adverse to a former client on substantially related matters. New Tekni-Plex met the three-prong test for disqualification: (1) a prior attorney-client relationship existed between M&L and old Tekni-Plex, which new Tekni-Plex assumed; (2) the current and former representations are substantially related; and (3) the interests of Tang and new Tekni-Plex are materially adverse. The court reasoned that when a corporation is acquired and the business operations continue, the control of the attorney-client privilege transfers to the new management. The Court cited Commodity Futures Trading Commn. v Weintraub, 471 U.S. 343 (1985), stating that “when control of a corporation passes to new management, the authority to assert and waive the corporation’s attorney-client privilege passes as well.” However, regarding communications about the merger, the court determined that because the merger agreement contemplated the potential for disputes between the buyer and seller, and because Tang was the sole shareholder of the seller, the privilege regarding those communications remained with Tang. Allowing new Tekni-Plex to control those communications “would thwart, rather than promote, the purposes underlying the privilege.” The court emphasized the need to encourage “full and frank communication between attorneys and their clients.”