Introduction
In M&A transactions, the negotiation of contractual provisions intended to protect against claims for fraud based on extra-contractual statements may be contentious. A series of recent decisions from the Delaware Court of Chancery has provided additional insight into the effectiveness of such “anti-reliance” clauses as a tool for establishing the “universe” of information upon which a potential post-closing fraud claim may (or may not) be based.
Under well-established Delaware law, emerging from the seminal decision in Abry Partners V, L.P. v. F&W Acquisition LLC, 891 A.2d 1032 (Del. Ch. 2006), an anti-reliance provision will effectively bar a fraud claim provided that the language reflects a clear disclaimer of extra-contractual statements. This result is based on the view that a prima facie element for fraud is reasonable reliance, and Delaware law recognizes the right of parties to bargain for a provision that precludes a party’s reliance on any statement (or omission) not contained within the agreement’s four corners. A typical formulation of an anti-reliance provision consists of an integration clause in conjunction with an “exclusive representation” clause—which disclaims reliance on any information not expressly embodied in a representation in the executed agreement. Although the decisions discussed in this article largely reinforce Delaware precedent as to enforceability of anti-reliance clauses, they remain instructive in reminding practitioners to guard against the foot faults associated with the inexact drafting of such provisions.
Prairie Capital III L.P. v. Double E Holding Corp., 132 A.3d 35 (Del. Ch. 2015).
In Prairie Capital, the purchasers under a stock purchase agreement asserted fraud claims based on allegedly falsified sales data provided by the company’s management. The agreement included an integration clause as well as an exclusive representations clause stating that the purchaser relied only on its own diligence and the seller’s express representations. The agreement, however, did not contain an express representation by the purchaser disclaiming reliance on extra-contractual statements. The Chancery Court dismissed the fraud claim, concluding that the integration clause and exclusive representations clause, when read together, were sufficient to “add up” to an enforceable anti-reliance clause.
Notably, the Chancery Court reasoned that although the exclusive representations clause was framed positively (i.e., purchaser’s representation that it was relying only on the specific representations in the agreement) rather than negatively (i.e., purchaser’s representation that it was not relying on any representations other than as set forth in the agreement), it was equally operative in establishing the “universe of information” on which a purchaser could assert reliance. The Chancery Court explained that no formulation of “magic words” is necessary under Delaware law to form an effective anti-reliance clause, provided that the relevant language unequivocally demonstrates that the purchaser was not relying on extra-contractual information. In this respect, Prairie Capital may be read as a subtle departure from the Delaware decision in Anvil Holding Corp. v. Iron Acquisition Co., Inc., 2013 WL 2249655 (Del. Ch. May 17, 2013). In Anvil Holding, the Court of Chancery found that a disclaimer provision that lacked an explicit statement of non-reliance by the purchaser, in conjunction with a clause broadly reserving the purchaser’s right to assert fraud claims, nullified the anti-reliance provision in order to allow a fraud claim based on extra-contractual statements to proceed.
A corollary point addressed in Prairie Capital is the interplay between an anti-reliance clause and a fraud claim based on fraudulent concealment (or omission) versus a claim based on affirmative misrepresentations. The Chancery Court rejected the position that the relevant anti-reliance clause did not bar a fraud claim based on fraudulent concealment due to the failure to explicitly disclaim the purchaser’s reliance on the “omission” of any information by the seller. The Chancery Court reiterated that the critical inquiry in interpreting anti-reliance language is the “universe” of information identified in the agreement upon which the parties structured their bargain; rather than focusing on the distinction between “misrepresentations” and “omissions.” The Chancery Court observed the symbiotic relationship between fraudulent misrepresentations and fraudulent concealment—which potentially can allow an aggrieved party to simply recast a “misrepresentation” as an “omission” for purposes of a fraud claim. Prairie Capital’s observation that “magic words” are not necessary to preserve the effect of an anti-reliance clause represents a slight variation in approach in comparison to the decision in TransDigm Inc. v. Alcoa Global Fasteners, Inc., 2013 WL 2326881 (Del. Ch. May 29, 2013), in which the Court of Chancery found a claim for fraudulent concealment viable where the acquisition agreement was silent as to a disclaimer of the “accuracy and completeness” of the representations.
The decision in Prairie Capital is interesting in its refusal to elevate “form over substance” in analyzing anti-reliance clauses, however, it would be perilous to view the decision as being representative of a material shift in the approach of Delaware courts in strictly construing anti-reliance clauses. While Prairie Capital recognizes that a failure to include “magic words” may not preclude the effectiveness of an otherwise robust anti-reliance clause, the Chancery Court expressly acknowledged that “transaction planners can limit their risk by using tested formulations.” As such, relying on precisely drafted anti-reliance clauses using familiar “magic words” remains the most efficient means of producing the desired outcome in avoiding liability for fraud grounded in extra-contractual statements.
FDG Logistics LLC v. FDG Associates, LP, 131 A.3d 842 (Del. Ch. 2016).
The FDG Logistics decision expanded on Prairie Capital and provided further clarity as to the analysis of anti-reliance clauses under Delaware law. FDG Logistics reaffirmed a bright-line standard in assessing the effectiveness of an anti-reliance provision—namely whether the party claiming reliance on an extra-contractual statement has unambiguously agreed in the contract not to rely on extra-contractual statements. In FDG Logistics, the acquirer in a merger asserted common law fraud claims based on extra-contractual statements made before execution of the merger agreement. The merger agreement included both an integration clause and an exclusive representations clause providing that no representations were being made beyond those embodied in the merger agreement. However, the merger agreement did not contain a reciprocal affirmative disclaimer of reliance by the acquirer on any representations outside the four corners of the merger agreement. The Chancery Court held that failure to include such an affirmative disclaimer of reliance by the acquirer precluded dismissal of the common law fraud claim. The Chancery Court observed generally that whether the anti-reliance language is framed positively or negatively is of less consequence than whether the disclaimer is framed from the point of view of the aggrieved party attempting to rely on the extra-contractual statements. FDG Logistics reiterates that the starting point under Delaware law as to the enforceability of an anti-reliance clause is whether the disclaimer is made by the party asserting fraud. In a sense, FDG Logistics reaffirmed that the “magic words” of establishing an unambiguous intent on behalf of the aggrieved party are a precondition to a viable anti-reliance provision.
Haney v. Blackhawk Network Holdings, Inc., 2016 WL 769595 (Del. Ch. Feb. 26, 2016).
In Haney, a stockholder representative asserted a fraudulent inducement claim following a merger, alleging that the acquirer failed to disclose an exclusivity provision in a contract to which the acquirer was a party. The exclusivity provision prevented the target company from entering into a post-merger contract with a customer, thereby depriving the former stockholders of the target company of earn-out consideration. The merger agreement included a fraud carve-out from the exclusive remedies provision as well as an integration clause, but did not contain an express anti-reliance provision. Despite the fact that the integration clause provided that no party made representations other than expressly set forth in the merger agreement, the Chancery Court concluded that the integration clause, standing alone, was not adequate to preclude fraud claims based on extra-contractual statements. It did so on the ground that the integration clause failed to rise to the level of an unambiguous acknowledgment of non-reliance by the allegedly aggrieved party, as required by Delaware law.
Haney reaffirms the decisions in Prairie Capital and FDG Logistics finding that an integration clause itself (without any corresponding exclusive representations clause) is insufficient to establish an unambiguous contractual acknowledgement of non-reliance on information outside the four corners of the agreement. The Haney decision illustrates that parties must be mindful of the inclusion of an anti-reliance provision in transactions where the acquirer makes representations that may affect an earn-out.
IAC Search, LLC v. Conversant LLC, C.A. No. 11774-CB (Del. Ch. Nov. 30, 2016).
The Court of Chancery’s most recent decision in IAC Search dismissed a claim for fraudulent inducement under a stock and asset purchase agreement based on the provision of allegedly false sales information furnished during due diligence. The agreement included an integration clause as well as a representation by the acquirer that it conducted its own diligence process and relied only on the agreement’s express representations. The Chancery Court found the relevant provisions to be in line with the precedent in Abry, Prairie Capital and FDG Logistics as adding up to a “clear disclaimer of reliance on extra-contractual statements” that barred the fraud claim. The IAC Search decision reiterated that this exclusive representations clause, framed from the aggrieved party’s perspective, circumscribed the “universe of due diligence information” on which that party relied (and did not rely) in executing the agreement. Further, the Court of Chancery noted Delaware’s public policy in respecting freedom of contract and that the acquirer was a sophisticated party that negotiated for express representations concerning similar financial metrics provided during the diligence process.
Practical Takeaways
These decisions refine existing Delaware law regarding the enforceability of anti-reliance clauses, and are instructive to practitioners seeking to avoid potential hazards. The decisions reinforce the importance of precise drafting in crafting effective anti-reliance language. Among other things, it is important to include within the anti-reliance provision as broad a scope as possible as to the source of the extra-contractual statements, which can include not only the parties, but their affiliates and representatives as well. In addition, it is important to establish the relevant “universe” of information covered by the anti-reliance provisions, such as financial projections or management presentations. Similarly, the acquisition agreement should specify what information, such as material contracts, that have been “made available” to a party for purposes of certain representations. By defining more specifically documents that were “made available” (e.g., those that were uploaded to a virtual data room as of a date certain prior to closing), parties can preserve a snapshot of this information and mitigate against the risk of subsequent disputes as to the “universe” of information relied upon with respect to the relevant representations and warranties.
Similarly, the scrutiny of disclaimer language by Delaware courts dictates that careful attention should be given to avoid “back doors” that can negate the intended purpose of such anti-reliance clauses. For example, Delaware courts will enforce anti-reliance clauses relating to representations outside of the agreement but will not read such clauses so broadly as to permit a party to insulate itself from liability for intentional misrepresentations within the agreement’s four corners. In this respect, practitioners should be mindful of a broad carve-out for “fraud” from an anti-reliance provision, since the use of the term “fraud,” standing alone, may not necessarily be interpreted as being limited only to an intentional misrepresentation. Finally, choice of law potentially impacts the efficacy of an anti-reliance provision, since California and, to a lesser degree, New York, interpret such provisions differently than Delaware. As such, the utility of an anti-reliance clause in guarding against the specter of extra-contractual fraud claims can be a significant consideration in negotiations over choice of law. Delaware law provides significant assurances to parties seeking protection against fraud liability for extra-contractual statements—but only by taking advantage of the “playbook” outlined by the Court of Chancery. An ounce of prevention by including an enforceable anti-reliance provision in an agreement can be worth a pound of cure in preserving a party’s interest under Delaware law.