Attorney-Client Privilege Does Not Shift In An Asset Sale

Attorney-Client Privilege Does Not Shift In An Asset Sale

       In a recent decision from Delaware, the court was called upon to consider who, after an asset sale, could assert the attorney-client privilege. On the facts of this case, it was held that the attorney-client relationship remained with the seller and had not shifted to the buyer. Re: DLO Enterprises, Inc. v. Innovative Chem. Prod. Grp., LLC, No. CV 2019-0276-MTZ, 2020 WL 2844497 (Del. Ch. June 1, 2020).

         In a merger, absent a contrary provision in the merger agreement, the attorney-client privilege with respect to pre-merger activities passes to the corporation/entity that survives the merger. See, e.g., Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, ADA3d 155 (Del. Ch. 2013). In this instance there was not a merger, but rather a sale of only a distinct list of assets. It goes without saying that the attorney-client relationship between the seller and its attorneys was not identified as an asset being conveyed. Hence, the attorney-client relationship remained with the seller.

       Adding a wrinkle of complexity, the transferred assets included computers that contained pre-transaction privileged communications between the seller and its attorneys. The court held that this disclosure did not constitute a waiver of the attorney-client privilege, and set up mechanisms by which to police the use of those communications by the purchaser. Other companies in similar situations may not be so lucky. Hence, as a practice pointer, if computers are being transferred in an asset transaction, it is advisable to carefully and comprehensively scrub them of attorney-client communications.