Does a Company’s Sale of Assets Pass Control of the Attorney-Client Privilege to the Purchaser?

December 22, 2010

Traditionally, a company’s sale of a subsidiary’s stock passed control of the privilege to the buyer, while the company’s sale of assets did not have that effect. However, that “bright line” rule has weakened over the past several years.

In Gilday v. Kenra, Ltd., No. 1:09-cv-229-TWP-TAB, 2010 U.S. Dist. LEXIS 106310, at *5 (S.D. Ind. Oct. 4, 2010), the court held that the privilege passed with the sale of “substantially all” of a company’s assets, and the purchaser’s continuation of operations “‘at the exact same location using the same computer systems, file cabinets, documents and other assets'” (internal citation omitted). The court explained that “[w]hether control transfers from one entity to another depends on the practical consequences of the transaction at issue,” and that “[a]cquisition of substantially all of the corporation’s assets and continuity of business operations support transfer of the privilege.” Id. at *6.

Lawyers representing companies contemplating either a stock or an asset sale should keep this trend in mind.