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Litigation: Attorney-client privilege needs special considerations when companies are bought and sold

Buyers should take care to structure their deals so as to maximize the possibility that they can maintain attorney-client privilege

In 1985 the U.S. Supreme Court confirmed that a corporation's officers and directors have the power to assert or waive the attorney-client privilege belonging to the corporation, and that when control of such corporation passes to new management, the authority to assert and waive the corporation's attorney-client privilege also passes. In Commodity Futures Trading Comm'n v. Weintraub. the court also found that former managers may not assert the privilege over the wishes of current managers, even as to statements that the former managers may have made to counsel concerning matters within the scope of their duties. Questions arise, however, when a business or only part of a business is sold or acquired over who then has the right to assert the attorney-client privilege.

Following Weintraub, several courts found that a transfer of assets, without more, was insufficient to affect a transfer of the attorney-client privilege; rather, the acquiring entity must also receive control of the entity possessing the privilege. See In re Grand Jury Subpoenas; Zenith Elecs. Corp. v. WH-TV Broad. Corp., (sale of certain assets did not transfer the right to invoke the attorney-client privilege, despite contract provision stating that the privilege transferred with the sale); Pilates, Inc. v. Georgetown Bodyworks Deep Muscle Massage Ctrs., Inc., (assignee of trademarks had no right to assert the attorney-client privilege where there was no transfer of control of the corporation).

In Soverain Software LLC v. The Gap, Inc., a federal district court enunciated a "practical consequences" test that has been followed by many courts since. Soverain found that "[i]f the practical consequences of the transaction result in the transfer of control of the business under new management, the authority to assert or waive the attorney-client privilege will follow as well." Because the plaintiff Soverain acquired a software business and related patents of bankrupt companies and then resumed the business, it could validly assert the privilege. See also AISLIC v. NWI-I, Inc. (only the entity that purchased substantially all of a bankrupt entity's business operations and continued to operate the business could assert privilege; two entities that acquired some properties and some stock, respectively, of the bankrupt entity could not).

Based on the case law emerging after Soverain, buyers of companies or other entities should take care to structure their deals so as to maximize the possibility that they can claim protection of the attorney-client privilege related to matters arising under former management. For example, an asset purchase agreement should state specifically that the purchaser intends to carry on the original business. A purchaser should use the same trade name for any product(s) continuing to be manufactured, should purchase the company's equipment and machinery used in manufacturing, and should assume the original entity's warranties and liabilities. To the extent that new owners or managers can persuade the court that they exert control over and are continuing the business of the former company, they should be entitled to protection.

Contributing Author

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Brigid Carpenter

Brigid M. Carpenter is a shareholder at Baker, Donelson, Bearman, Caldwell & Berkowitz, PC (Nashville). Her practice focuses on products liability and other tort/personal injury...

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