DLO Enterprises, Inc. v. Innovative Chemical Products Group, LLC, 060120 DECH, 2019-0276-MTZ
| Date | 01 June 2020 |
| Docket Number | C. A. 2019-0276-MTZ |
| Court | Court of Chancery of Delaware |
| Parties | DLO Enterprises, Inc. v. Innovative Chemical Products Group, LLC, |
Dear Counsel:
I write regarding Counterclaim Plaintiffs' January 16, 2020, Motion for Disposition of Privilege Dispute (the "Motion").1 In the Motion, Counterclaim Plaintiffs Innovative Chemical Products Group, LLC and ICP Construction, Inc. (collectively, "Buyers") request an order compelling Counterclaim Defendants DLO Enterprises, Inc., 301 L&D, LLC, and Daniel and Leane Owen (collectively, the "Owen Sellers," and with the entities, "Sellers") to produce unredacted copies of certain documents and an order clarifying privilege was waived over other documents in Buyers' possession. For the following reasons, the Motion is denied in part and remains under advisement in part pending supplemental briefing.
I.
Background
This action addresses Buyers' acquisition of substantially all of the assets of Arizona Polymer Flooring, Inc. ("Target") via an Asset Purchase and Contribution Agreement, dated January 17, 2018, by and among Buyers, Sellers, and Target (the "Purchase Agreement").2 Buyers' operating entity for the acquired assets is Arizona Polymer Flooring, LLC ("BuyerCo"). Following the execution of the Purchase Agreement, Target was renamed DLO Enterprises, Inc. ("DLO").
The year before the Purchase Agreement, Target developed and sold a certain line of adhesive products that accounted for approximately $1.8 million in sales, but suffered from defects.3 The parties dispute who bears the financial responsibility for defective products that were sold pre-Purchase Agreement, but that were returned post-Purchase Agreement. Buyers assert Sellers knew of the products' problems and knowingly misrepresented that Target's financial statements contained no undisclosed liabilities and that the products met certain quality and workmanship standards.4
Sellers filed a Verified Complaint on April 10, 2019, and Buyers filed an Answer and Verified Counterclaims on May 6. Buyers issued their First Set of Requests for Production of Documents to Sellers on July 25 (the "Requests").5 A dispute arose regarding the privilege associated with various documents responsive to the Requests, as well as emails between the Owen Sellers and counsel on email accounts Buyers acquired through the asset purchase. The parties met and conferred multiple times regarding the privilege issues, but were unable to resolve them.6 The Motion followed. The parties fully briefed the Motion by February 14. On February 27, I heard argument and took the matter under advisement.
Buyers seek to compel the production of two categories of responsive privileged documents: (1) Documents reflecting communications between the [Sellers] and their former attorneys at Boyer Bohn, P.C., who represented them in the Acquisition, which the [Sellers] have collected and produced in redacted form based on assertions of privilege in this litigation (the "Category One Documents");
(2) Documents reflecting communications between the [Sellers] and Boyer Bohn, P.C., which [Buyers are] currently in possession of because these documents were left in [Buyers'] email accounts (the "Category Two Documents").7
The Category One Documents are a subset of Sellers' pre-closing deal communications that Sellers produced to Buyers in this litigation. Sellers produced the Category One Documents in response to the Requests relating "to the sale of the assets and the negotiation of the asset purchase agreement."8 They did so in redacted form based on attorney-client privilege, and now seek to protect those redacted portions as privileged. Buyers seek unredacted versions of the Category One Documents, contending that Sellers' pre-closing privilege passed to Buyers by operation of Delaware law, and that Buyers also purchased the right to waive privilege over Sellers' deal negotiations via the Purchase Agreement. Buyers do not contend that Category One Documents remained on the email accounts that were transferred to Buyers under the Purchase Agreement.
The Category Two Documents consist of 48 pre-closing communications and 28 post-closing communications between the Owen Sellers and their counsel on email accounts transferred to Buyers in the transaction.9 Post-closing, Daniel Owen continued to use his Buyers email account to communicate with attorneys; accordingly, those emails have always been in Buyers' possession.10 Sellers seek to protect the Category Two Documents as privileged. Buyers contend Sellers waived any privilege over the Category Two Documents when they transferred Target's email accounts containing pre-close emails to Buyers, and when the Owen Sellers continued to use them to communicate with counsel post-close. In support, Buyers contend the Owen Sellers did not have an expectation of privacy when they used the email, both before and after the transfer.
Thus, Buyers seek the two categories under two different privilege waiver doctrines. I first consider whether the right to waive privilege over the Category One Documents passed to Buyers by law or contract. Then I consider whether Sellers waived privilege over the Category Two Documents.
II.
Analysis
Delaware has long recognized that the attorney-client privilege "protects the communications between a client and an attorney acting in his professional capacity where the communications are intended to be confidential, and the confidentiality is not waived."11 Delaware Rule of Evidence 502 limits the attorney-client privilege to "confidential communications" between a lawyer and client for the purposes of facilitating legal services.12 The attorney-client privilege "extends to a (1) communication, (2) which is confidential, (3) which was for the purpose of facilitating the rendition of professional legal services to the client, (4) between the client and his attorney."[13] "The burden of establishing that otherwise discoverable information is privileged rests 'on the party asserting the privilege.'"14 Sellers claim attorney-client privilege over both categories of documents.
A. Category One Documents
With respect to the Category One Documents, the parties dispute whether in the Purchase Agreement or by operation of law, Buyers purchased the right to waive Sellers' privilege over pre-close deal communications. To address this issue, both parties looked to common law addressing privilege in a merger.15 In Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, then-Chancellor Strine established a baseline rule for attorney-client privilege in the merger context.16Great Hill addressed an issue of first impression: whether Section 259 of the DGCL (which provides that following a merger, "all property, rights, privileges, powers and franchises, and all and every other interest shall be thereafter as effectually the property of the surviving or resulting corporation") includes attorney-client privilege and communications regarding merger negotiations.17
The Court determined that absent "an express carve out, the privilege over all pre-merger communications-including those relating to the negotiation of the merger itself-passed to the surviving corporation in the merger, by plain operation of clear Delaware statutory law under § 259 of the DGCL."18 "[T]he answer to any parties worried about facing this predicament in the future is to use their contractual freedom in the manner shown in prior deals to exclude from the transferred assets the attorney-client communications they wish to retain as their own."19 In Great Hill, "the Seller did not carve out from the assets transferred to the surviving corporation any pre-merger attorney-client communications," and the Court determined it would "not unilaterally read such a carve out into the parties' contract."20
Vice Chancellor McCormick recently reinforced this principle in Shareholder Representative Services LLC v. RSI Holdco ("RSI Holdco II"). She determined the sellers in a merger heeded Great Hill's advice and successfully "used their contractual freedom to secure a provision in the merger agreement, which preserved their ability to assert privilege over pre-merger attorney-client communications."21RSI Holdco II illustrates the importance of explicitly and clearly contracting for the treatment of pre-closing privileged communications that would otherwise be transferred to a purchaser via merger under Section 259 and Great Hill.
But Section 259 and Great Hill's interpretation of it do not apply here, as this case centers on an asset purchase, not a merger. Then-Chancellor Strine acknowledged as much in Great Hill when distinguishing Postorivo v. AG Paintball Holdings, Inc., an asset purchase case in which the Court applied New York law to an asset purchase agreement that excluded certain assets, rather than a merger that included all assets, and the parties had agreed that under the specific contractual terms of their transaction, the seller retained the attorney-client privilege over communications relating to the negotiation of the transaction . . . . Postorivo did not even cite § 259 of the DGCL.[22]
He also characterized Great Hill's question presented as "an issue of statutory interpretation in the first instance."23 Mergers governed by statute, which automatically transfer "all property, rights, privileges, powers and franchises, "[24] are distinct from asset purchase transactions governed by agreements, which enumerate the assets being sold. In this case, we must look to the Purchase Agreement, not a statute, to determine if Buyers purchased certain assets and privileges.
In addition to their different sources of governance, mergers and asset purchases present practical differences. Unlike a merger, in an asset purchase transaction, the selling entity is not extinguished by or subsumed within the purchasing entity.25 The seller still exists, holding any assets that were not...
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