Chancery Discusses Privilege Waiver in Context of Asset Purchase

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In DLO Enterprises, Inc. v. Innovative Chemical Products Group, LLC, the Delaware Court of Chancery discussed privilege waiver in a dispute between a buyer and a seller involving an asset purchase agreement. The dispute centered around which party was financially responsible for defective products that were sold pre-Purchase Agreement, but that were returned post-Purchase Agreement.

Litigation was commenced and a dispute arose regarding the privilege associated with various documents responsive to discovery requests, as well as emails between the sellers and counsel on email accounts buyers acquired through the asset purchase.

Buyers sought to compel the production of two categories of responsive privileged documents:

  • Documents reflecting communications between the sellers and their former attorneys who represented them in the acquisition (the “Category One Documents”);
  • Documents reflecting communications between the sellers and their former attorneys which were currently in possession of buyer because these documents were left in buyers’ email accounts (the “Category Two Documents”).

Category One Documents

The court initially noted that cases such as Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP and  Shareholder Representative Services LLC v. RSI Holdco were not applicable because those cases arose in the context of a statutory merger.

The court held in the asset purchase context, the seller will retain pre-closing privilege regarding the agreement and negotiations unless the buyer clearly bargains for waiver or a waiver right. Here, the buyers failed to explicitly secure pre-closing privilege waiver rights relating to the negotiation of the Purchase Agreement.

Section 8.9 of the Purchase Agreement gave buyers waiver rights over the privilege relating to Assets and Assumed Liabilities transferred to buyers.  The question presented to the court was whether deal communications related to Assets and Assumed Liabilities.

Section 1.2 of the Purchase Agreement defined Excluded Assets to include the sellers’ “rights under or pursuant to this Agreement and agreements entered into pursuant to this Agreement.” Section 8.9’s privilege waiver for Assets did not reach deal communications because Sellers’ rights under or pursuant to the Purchase Agreement were carved out as an Excluded Asset under Section 1.2.

Category Two Documents

Post-Closing Communications

The Category Two Documents consisted of 48 pre-closing documents and 28 post-closing documents.  These were emails between the sellers and their attorneys on email accounts transferred to buyers as part of the acquisition, and so were in buyers’ possession. Buyers argued that by allowing the emails to fall into buyers’ hands, the sellers waived any attorney-client privilege over these documents.

The Court stated  In re Asia Global Crossing, Ltd. and In re Information Management Services, Inc. Derivative Litigation, were the appropriate tests for the 28 post-closing communications with Daniel Owen while he was Vice President of BuyerCo.   The appropriate lens was an employee’s reasonable expectation of privacy in work email.

Asia Global set forth four factors to consider as to whether there was a reasonable expectation of privacy in work related email.  The court found for post-closing Category Two Documents, three of the four Asia Global factors pointed towards production and one was neutral. But the court stated the inquiry does not end there. In Information Management, the court recognized a potential statutory override of the Asia Global analysis. If a controlling jurisdiction has a statute on the confidentiality of work emails, that statute may alter the common law results of the Asia Global analysis. The parties did not brief this portion of the analysis. To complete the analysis, the court requested the parties submit supplemental briefing on a potential statutory override.

Pre-Closing Communications

As to the pre-closing communications in Buyers’ possession, the court noted the proper test may be one of inadvertent production, rather than solely a consideration of the employees’ expectation of privacy when working for target. The proper analysis should also consider who holds the privilege over the communications.  Sellers may hold the privilege over the sellers’ emails, such that access to the sellers’ emails would not destroy any relevant confidentiality. The court therefore requested supplemental briefing on the proper test to assess whether sellers waived privilege of the pre-closing deal communications that remain on email accounts transferred to buyers under the Purchase Agreement.

Buyers’ Review of Potentially Privileged Communications

The court stated it could not ignore buyers’ counsel’s inappropriate review of the content of the potentially privileged Category Two Documents in their possession. Upon realizing buyers possessed potentially privileged documents, counsel should have abstained from reviewing their content, and instead segregated the documents, perhaps by using metadata, pending resolution of the privilege dispute. Counsel should not have viewed these documents prior to resolving the privilege issues associated with them according to the court. Upon resolution of the pending motion, the court stated sellers may file a letter outlining the relief they deem appropriate to rectify this wrong as it relates to the Category Two Documents if they, or any subset thereof, are found to be privileged.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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