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Postorivo v. AG Paintball Holdings, Inc., C.A. Nos. 2991-VCP, 3111-VCP (Del. Ch. Feb. 7, 2008) (V.C. Parsons)

February 7, 2008

In the course of resolving a discovery dispute, the Court of Chancery addressed which entity properly holds the attorney-client privilege in connection with certain categories of communications in view of the sale to defendants of substantially all of the assets of National Paintball Supply Inc. (“NPS”). Plaintiff Eugenio Postorivo (“Postorivo”), was the founder and sole owner of National Paintball Supply Inc. (“NPS”). NPS had sold substantially all its assets to defendants pursuant to the terms of an asset purchase agreement (“APA”). Defendants formed Kee Action Sports Holdings, Inc. (“KEE Action”), which utilized the assets to continue to operate the NPS’s former business. Pursuant to the terms of the APA, Postorivo and NPS retained certain assets and liabilities, including rights arising out of certain litigation (the “Procaps Litigation”). The Court addressed which entity held the attorney-client privilege in connection with the following categories of communications: “(1) communications, pre- and post-APA, that impact the ongoing business of the post-acquisition entity; (2) communications regarding the APA; and (3) communications concerning excluded assets and liabilities, e.g., the Procaps Litigation.”
The parties agreed, and the Court confirmed, that KEE Action held the attorney-client privilege for communications impacting the ongoing business of the post-acquisition entity, including pre-APA communications, because “KEE Action stands in the shoes of the former NPS management and holds the attorney-client privilege that NPS formerly held.” The parties also agreed (and the Court confirmed) that Postorivo and NPS retained the attorney-client privilege for communications that Postorivo and NPS had with in-house and outside counsel regarding the negotiation of the APA because the rights of NPS arising from the APA “were independent from, and adverse to,” the rights of KEE Action. The parties disputed, however, which entity held the attorney-client privilege in connection with communications concerning the assets and liabilities excluded by the terms of the APA. Postorivo and NPS argued that the privilege belonged to them pursuant to the explicit terms of the APA. The defendants argued that “[a] corporation’s attorney-client privilege cannot be split among several different entities, even if there is a written contract” purporting to do so. The Court, considering the “practical consequences rather
than the formalities” of the asset sale, determined that NPS and Postorivo would continue to hold the privilege in connection with the excluded assets and liabilities. The Court noted that NPS would have to prosecute the Procaps Litigation and should be able to assert or waive the attorney-client privilege in connection with such prosecution. Moreover, the Court noted that it “generally eschews mandating actions contrary to the intent explicitly reflected in freely negotiated contracts among sophisticated, well-represented parties.”