In DLO Enterprises, Inc. v. Innovative Chemical Products Group, LLC, the Delaware Court of Chancery (the “Court”) in an unpublished opinion analyzed whether the asset purchase agreement included the sale to the buyer of the target company’s and its employees’ pre-closing and post-closing communications with their attorneys.  In January 2018, Innovative Chemical Products Groups LLC and ICP Construction, Inc. (together, “Buyers”) purchased substantially all of the assets of Arizona Polymer Flooring, Inc. (“Target”) from DLO Enterprises, Inc., 301 L&D, LLC, and Daniel and Leane Owen (the “Owen Sellers,” and, together with the entity sellers, the “Sellers”) via an Asset Purchase and Contribution Agreement (“APA”).

Buyers sought to compel production of pre-closing deal-related communications between the Sellers and their attorneys which Sellers collected, redacted based upon Sellers’ assertion of attorney-client privilege and produced to the Buyers.

The Court explained the default rule under Delaware law in a merger, which is that the attorney-client privilege transfers since “all property, rights, privileges, powers and franchises” become “the property of the surviving or resulting corporation.”  The parties to a merger are free to contractually exclude the attorney-client communications that they wish the sellers to retain, but in the absence of such an exclusion, the attorney-client communications of the merged entity become owned by the surviving entity in the merger.  The Court then contrasted asset purchases to mergers, stating that attorney-client privilege to pre-closing communications in an asset sale would not pass to a buyer absent an explicit waiver of the attorney-client privilege relating to the negotiation of the APA.

The APA provided that Sellers sold Buyer all of Sellers’ assets other than the Excluded Assets and the Contributed Assets and that “[t]he parties intend that, at all times after the Closing, [Buyer] will have the right in its discretion to assert or waive any attorney-work product protections, attorney-client privileges and similar protections and privileges relating to the Assets and Assumed Liabilities (emphasis added).  The APA defined “Excluded Assets” as “the Sellers’ rights under or pursuant to” the APA and the agreements entered into pursuant to the APA.  Based on the foregoing, the Court found that deal communications fell within the meaning of Excluded Assets that were not purchased by the Buyer and denied Buyers’ motion to compel the unredacted versions of the communications.

Key Takeaways

In agreements governed by Delaware law, Sellers in any transaction form – equity securities, asset purchase or merger – should ensure that the purchase agreement specifically addresses ownership of attorney-client privileged and attorney work-product privileged communications in order to avoid disputes over these issues after the transaction closes.

The importance of this is readily apparent from the underlying facts in DLO, where the parties disputed which party should bear financial responsibility for defective products sold prior to closing that were returned after closing. Buyers asserted that Sellers knew of the products’ problems and knowingly misrepresented (a) that the Target’s financial statements contained no undisclosed liabilities and (b) that the products met certain quality and workmanship standards.  This dispute led to the Buyers’ demands to view pre-closing communications between the Sellers and their counsel.

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Photo of Nancy B. Bostic Nancy B. Bostic

Leader if Gray Reed’s Mergers and Acquisitions and Private Equity Practice Group, Nancy Bostic represents public and private companies and private equity funds in securities issuances, acquisitions and dispositions of assets and equity, joint ventures, recapitalizations, financings and change of control transactions valued…

Leader if Gray Reed’s Mergers and Acquisitions and Private Equity Practice Group, Nancy Bostic represents public and private companies and private equity funds in securities issuances, acquisitions and dispositions of assets and equity, joint ventures, recapitalizations, financings and change of control transactions valued at up to $3.5 billion.

Photo of Grace G. Rollinger Grace G. Rollinger

Grace is a corporate lawyer committed to helping clients solve immediate business needs without losing sight of their long-term goals. Her practice is primarily focused on the negotiation and structuring of mergers and acquisitions, a variety of commercial agreements, entity formation, private equity…

Grace is a corporate lawyer committed to helping clients solve immediate business needs without losing sight of their long-term goals. Her practice is primarily focused on the negotiation and structuring of mergers and acquisitions, a variety of commercial agreements, entity formation, private equity offerings, and asset and stock sales.