Reed Smith Client Alerts

The Delaware Court of Chancery recently ruled, in DLO Enterprises, Inc. v. Innovative Chemicals Products Group, LLC, 2020 WL 2844497 (Del. Ch. June 1, 2020), that a seller’s pre-closing privileged communications do not pass to the buyer in connection with an asset-sale transaction, absent contrary contractual terms that specifically provide the seller is transferring its privileged communications. The court’s decision in DLO Enterprises distinguishes Delaware law relating to merger transactions in which, absent contrary contractual terms, the target company’s pre-closing attorney-client privilege passes to the acquirer. Commercial parties should carefully consider whether to include contractual provisions that expressly govern any transfer or retention of pre-closing privileges to avoid application of the default rules under Delaware law, which produce opposite results depending on how the transaction is structured.

Authors: Brian M. Rostocki Benjamin P. Chapple Alexandria P. Murphy

Case background

In DLO Enterprises, a seller brought claims against a buyer for breach of an asset purchase agreement (the Agreement), by which the buyer purchased substantially all of the seller’s assets. The seller’s allegations included that the buyer failed to follow contractual indemnification procedures and took other improper actions. The buyer filed counterclaims, including for breach of contract and fraudulent inducement.

Section 1.1 of the Agreement stated the seller would transfer, and the buyer would acquire, all of the seller’s “right, title and interest” in all of the seller’s assets, including “all files” and “all inventory.” Section 1.1 further provided the seller’s transfer excluded the “Excluded Assets,” defined to include the seller’s “rights under or pursuant to this Agreement and agreements entered into pursuant to this Agreement.” Section 8.9 of the Agreement stated “[t]he parties intend that, at all times after the Closing, [the buyer] will have the right in its discretion to assert or waive any attorney work-product protections, attorney-client privileges and similar protections and privileges relating to the Assets and Assumed Liabilities.”

The seller’s owners prior to the asset sale (the Seller Owners) worked for the buyer following the closing of the transaction. During discovery proceedings, a dispute arose between the parties regarding the privilege associated with various documents responsive to discovery requests, as well as emails between the sellers, the Seller Owners, and counsel on email accounts that the buyers acquired through the asset purchase. Specifically, the parties disputed whether the seller and the Seller Owners could claim attorney-client privilege over three categories of documents.

The buyer argued, under Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155 (Del. Ch. Nov. 15, 2013), any privilege over the seller’s pre-transaction communications passed to the buyer in the sale, and Section 8.9 of the Agreement waived privilege. The seller argued Great Hill was inapplicable and that its privilege fell within the Agreement’s Excluded Assets definition and, therefore, did not transfer. The buyer filed a “Motion for Disposition of Privilege Dispute,” seeking an order compelling production of the disputed materials.