Delaware Court Analyzes Who Owns the Privilege After a Corporate Transaction

April 30, 2008

Under courts’ traditional approach, the sale of a corporation’s stock conveys the attorney-client privilege to the new owner, while the sale of a corporation’s assets does not. In recent years, some courts have looked at the “practical consequences” of corporate transactions, and have found that a purchaser buying substantially all of a company’s assets (usually out of bankruptcy) also buys the privilege. See, e.g., Coffin v. Bowater Inc., Civ. No. 03-227-P-C, 2005 U.S. Dist. LEXIS 9395, at *7 (D. Me. May 13, 2005).

A Delaware court recently engaged in an even more subtle analysis. In Postorivo v. AG Paintball Holdings, Inc., Cons. Civ. A. No. 2991-VCP, 2008 Del. Ch. LEXIS 17 (Del. Ch. Feb. 7, 2008) (unpublished), the court addressed a transaction in which a company sold some assets to a buyer, but retained other assets. The court ultimately held that (1) the purchaser owned the privilege covering the seller’s “ordinary course of business” communications occurring before the transaction; (2) the seller owned the privilege covering communications relating to the transaction; and (3) the seller owned the privilege relating to the assets it retained.

Corporations have little if any control over the privilege’s ownership in corporate transactions, and their lawyers therefore should familiarize themselves with this trend away from the traditional approach.