Court Takes a Common Sense Approach to the Privilege’s Ownership After a Corporate Transaction

December 31, 2008

Courts traditionally recognized a bright-line rule governing the privilege’s ownership in corporate transactions — holding that a corporation’s privilege passed to the purchaser of the corporation’s stock, but not its assets. More recently, some courts have engaged in a functional analysis, sometimes finding that the privilege passes in an asset sale.

In Orbit One Communications, Inc. v. Numerex Corp., Nos. 08 Civ. 0905 (LAK) (JCF) & 08 Civ. 6233 (LAK) (JCF), 2008 U.S. Dist. LEXIS 90981, at *2 (S.D.N.Y. Oct. 31, 2008), well-respected Magistrate Judge James Francis dealt with litigation between Orbit One and Numerex — which had purchased “substantially all” of Orbit One’s assets. Judge Francis relied on an earlier New York case and on the acquisition agreement (which conveyed “only what is ‘used in the [Seller’s] Business'”) in concluding that (1) Numerex was entitled to all privileged communications relating to the continuing business operations of what was Orbit One, “because it needs this information to run the business effectively”; but (2) Numerex was not entitled to privileged communications “concerning the acquisition transaction,” because Numerex did not need those documents to operate the business, and because handing them over would “lead to a fundamentally unfair result.” Id. at *19, *20 (citation omitted).

Lawyers representing corporations engaged in stock or asset transactions should try to deal during the transaction (to the extent possible) with the privilege’s ownership after the sale, and keep themselves informed about pertinent case law. Given Judge Francis’s excellent reputation, other courts might follow his common-sense approach.