Asset Purchase Agreements in Section 363 Sales Should Address Who Controls the Attorney-Client Privilege and Whether the Privilege Is Waived Post-Sale

June 2020

Publication| Bankruptcy & Corporate Restructuring

It has been eleven years since a leading bankruptcy journal published an article entitled “Who Owns Privileged E-Mails in a § 363 Sale Case? Is Ownership Waived When the Debtor’s Computer Servers are Sold?” (the “2009 Article”). The 2009 Article suggested that parties should carefully address in the asset purchase agreement (a) who owns the attorney-client privilege after a bankruptcy sale – the buyer or the seller – and (b) how to avoid waiver of the privilege if the answer is the seller but the buyer has physical possession of the Seller’s email and document server. A few years later, then Chancellor (and later Delaware Supreme Court Chief Justice) Leo Strine cited the 2009 Article with approval in a merger case, holding that parties should exercise their freedom of contract to alter state law default rules if so desired.

Since then, M&A lawyers outside of bankruptcy have taken heed. Numerous subsequent articles have noted the trend of including such terms in merger agreements and asset purchase agreements, and have even suggested specific suggested model language.

Yet surprisingly, eleven years later, the same cannot be said in the world of Chapter 11 practice. No reported bankruptcy court opinion in the last eleven years appears to have ruled on or even discussed the issue. Moreover, a random sampling of asset purchase agreements from Section 363 sales seems to indicate that parties more often than not do not address the issue of who owns the privilege after the closing of the sale, or if they do, frequently do so in a fairly perfunctory manner. Very few of the asset purchase agreements reviewed in this random sample attempt to grapple with the waiver issue in any meaningful manner.

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