Corporate stock and asset sale transactions necessarily implicate ownership of: (1) ordinary day-to-day privileged communications about environmental matters, labor matters, etc., and (2) privileged communications about the transactions themselves. Buyers and sellers normally agree that the buyer should receive the first type, but disputes frequently arise about the second type.
In DLO Enterprises, Inc. v. Innovative Chemical Products Group, LLC, C.A. No. 2019-0276-MTZ, 2020 Del. Ch. LEXIS 202 (Del. Ch. June 1, 2020), the Delaware Chancery Court pointed to earlier Delaware case law indicating that by statute the purchaser of a corporation’s stock acquires the corporation’s privileged transactional documents -- unless the seller explicitly excludes them. Interestingly, New York law takes the opposite position. Tekni-Plex, Inc. v. Meyner & Landis, 674 N.E.2d 663 (N.Y. 1996). DLO Enterprises instead involved an asset sale, so the court explained that “we must look to the Purchase Agreement, not a statute, to determine if Buyers purchased certain assets and privileges.” 2020 Del. Ch. LEXIS 202, at *8. Because the Agreement listed “this litigation [as] an Excluded Liability,” “the privilege for this litigation remains with the [assets’] Sellers.” Id. at *10. Thus, asset sales involve a “baseline rule governing pre-closing privilege” that differs from a stock sale context. Id. at *11. This means that “the seller will retain pre-closing privilege regarding the agreement and negotiations unless the buyer clearly bargains for waiver.” Id. The court noted that “[h]ere, Buyers failed to explicitly secure pre-closing privilege waiver rights relating to the negotiation of the Purchase Agreement.” Id.
In both stock and asset sale transactions, the best practice is always to explicitly negotiate ownership of: (1) the day-to-day privileged documents; and (2) more importantly, the privileged transactional documents. The DLO Enterprises court also dealt with both pre-closing and post-closing privileged communications housed on email accounts the buyer purchased. Next week’s Privilege Point addresses the court’s analysis of their ownership.