Delaware Business Litigation Report

Chancery Finds Pre-Closing Privilege Did Not Transfer to Buyer Under Asset Purchase Agreement

DLO Enterprises, Inc. v. Innovative Chemical Products Group, LLC, C.A. No. 2019-0276-MTZ (Del. Ch. June 1, 2020).

Defendants/Counterclaim Plaintiffs (“Buyers”) acquired substantially all of the assets of Arizona Polymer Flooring, Inc., later renamed DLO Enterprises, Inc. (“Sellers”). Sellers filed this action disputing who was financially responsible for certain defective products. During discovery, Sellers produced several pre-closing communications with their counsel that were redacted in part to protect the privilege. Buyers filed a motion to compel unredacted copies of the documents.

In denying Buyers’ motion, the Court found that the right to waive privilege over these documents did not pass to Buyers either by law or contract. The Court of Chancery has held that, in the merger context, the privilege over all pre-merger communications passes to the surviving corporation under Delaware statutory law (i.e., 8 Del. C. § 259) unless there is an express carve out in the merger agreement. See Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155 (Del. Ch. 2013). The Court, however, reasoned that the same default rule does not apply when there is an asset purchase rather than a merger. In an asset purchase, the seller still exists and holds any assets and related privileges that were not explicitly purchased under the asset purchase agreement. Under the Purchase Agreement between Buyers and Sellers here, Buyers did not contract for the right to assert or waive privilege over Sellers’ communications about the transaction; therefore, that right remained with the Sellers.

The Court requested supplemental briefing on the issue of Sellers’ communications with counsel that were in Buyers’ possession because the email accounts were transferred to Buyers in the transaction. The Court noted, however, that upon realizing that they had potentially privileged documents, Buyers’ counsel should not have reviewed the content of those documents and should have segregated them pending resolution of the dispute. The Court held that, should any of those documents be found to be privileged, Sellers’ counsel may file a letter outlining any relief that they deem to be appropriate for Buyers’ review of such documents.

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