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February 15, 2018 Practice Points

Delaware Court Highlights Interplay Between Anti-Reliance Clauses and Fraud Carve-Outs in Merger Agreements

When is an anti-reliance provision in a merger agreement an unreliable shield against fraud claims?

by Travis S. Hunter

Merger agreements often contain provisions reciting that the representations in the agreement are the sole representations relied on in entering the contract. Such clauses are known as anti-reliance clauses and, if properly drafted, can limit fraud claims. Merger agreements also typically contain “fraud carve-outs.” According to the ABA Private Target Mergers and Acquisitions Deal Points Studies, fraud carve-outs were included in approximately 90 percent of agreements.  

The interplay between anti-reliance clauses and fraud carve-outs was recently highlighted in a decision from the Delaware Superior Court’s Complex Commercial Litigation Division (CCLD). In Novipax Holdings LLC, et al. v. Sealed Air Corp., et al., C.A. No. N17C-03-1682 EMD, 2017 WL 5713307 (Del. Super. Ct. Nov. 28, 2017), Judge Eric Davis denied a motion to dismiss a complaint filed by plaintiffs Novipax Holdings LLC and Novipax LLC (collectively, Novipax) against defendants Sealed Air Corporation, Cryovac, Inc., Sealed Air Corporation (US), and Sealed Air Corporation (Canada) (collectively, Sealed Air). Novipax had entered into an asset purchase agreement (APA) in connection with its acquisition of Sealed Air’s foam tray and pads business. Novipax alleged that Sealed Air omitted and concealed information from, and made material misrepresentations to Novipax in order to mislead and induce it into buying the business. After Novipax brought suit against Sealed Air, Sealed Air filed a motion to dismiss contending that the claims were barred by the terms of the contract.

In support of its motion, Sealed Air argued that the anti-reliance and integration provisions of the APA limited the representations and warranties that could be relied on by either party to those contained within the APA and that the APA superseded all prior understandings or representations, thus barring Novipax’s fraud claims. In response, Novipax argued that the non-reliance and integration provisions did not bar its fraud claim because another section in the APA expressly preserved the claim. In support of this argument, Novipax cited Anvil Holding Corp. v. Iron Acquisition Co., C.A. No. 7975-VCP, 2013 WL 2249655 (Del. Ch. May 17, 2013), and Airborne Health, Inc. v. Squid Soap LP, 984 A.2d 126 (Del. Ch. 2009). In Anvil, the court refused to dismiss a fraud claim based on the agreement’s anti-reliance provision because the provision did not unambiguously demonstrate that both parties disclaimed reliance on extra-contractual statements and the agreement’s exclusive remedy clause preserved the fraud claim. In Airborne, the court held that the APA in dispute did not bar fraud claims because the integration clause was insufficient to operate as an anti-reliance provision and the exclusive remedy provision preserved the fraud claim. Ultimately, Judge Davis found the present case to lie somewhere between Anvil and Airborne because both parties expressly represented in the APA that they were not relying on extra-contractual representations, but also included an exclusive remedies provision that expressly preserved fraud claims. Although Judge Davis stated that “the non-reliance provision likely places a limit on the types of fraud claims that can be brought to those based on written representations in the APA,” the fraud claim survived the motion to dismiss due to the conflicting provisions in the APA. Novipax, 2017 WL 5713307 at *12.

The court’s decision in Novipax highlights how anti-reliance provisions and fraud carve-out provisions are interpreted when included together in the same merger agreement. In an effort to construct a harmonious reading of all contractual provisions, the court concluded that fraud claims were available but needed to be based on intra-contractual, rather than extra-contractual, representations.

Travis S. Hunter is counsel at Richards Layton & Finger, P.A. in Wilmington, Delaware.

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