Delaware Court Clarifies Retention of Privilege in Asset Sales

June 23, 2020

A June 1, 2020, unpublished opinion from the Delaware Chancery Court clarified the default rule governing the retention of privileged communications in asset purchases, as distinct from mergers or other transactions in which an entire company is purchased.

In DLO Enterprises, Inc. v. Innovative Chemical Products Group, LLC, the Chancery Court examined whether an asset purchase agreement included the right to pre-closing privileged communications between the sellers and their counsel. The court recognized that in the merger context — where all of the property, rights and privileges of the entity being sold go to the buyer — the default rule in Delaware states that the attorney-client privilege, and communications between sellers and their attorneys regarding the merger negotiations, passes as well. In those situations, it is the selling entity’s responsibility to exclude from the transferred assets the attorney-client privilege that it wishes to remain with the sellers or their representatives.

Conversely, the court in DLO Enterprises held that in an asset purchase, where the selling entity is not being extinguished or subsumed within the purchasing entity and the assets being transferred are clearly defined in the purchase agreement, the default rule is that the privilege regarding the agreement and related negotiations remains with the seller, unless the buyer specifically contracts for something different. Examining the asset purchase agreement at issue, the court concluded that the buyers had not identified a clear contractual right to the privileged communications at issue and that, as a result, they had not purchased the pre-acquisition privilege, which remained with the sellers.

Buyers in asset purchase agreements governed by Delaware law should therefore consider the advice of the Chancery Court and specifically negotiate for the right to include privileged communications in the assets being purchased in the agreement, and be prepared to pay for them accordingly, if they believe that such communications will be of value in the future. And both buyers and sellers should take advantage of their contractual freedom by addressing the issue of pre-acquisition privilege in purchase agreements in order to avoid any doubts about the ability, or lack thereof, to assert such privilege after closing.