Delaware Cases Clarify Scope of M&A Non-Reliance Clauses


By Michael Greene

March 10 — As deal activity continues its hectic pace, companies and corporate counsel should keep in mind two recent Delaware Chancery Court opinions that are instructive on when buyers may pursue fraud claims over mergers and acquisitions.

Attorneys told Bloomberg BNA that the decisions provide clear guidance on when non-reliance provisions—clauses stating that the parties haven't relied on extra-contractual information—can bar fraud claims based on information outside of the representations and warranties made in M&A agreements.

For maximum protection, sellers must ensure that non-reliance provisions identify with sufficient clarity the information on which the parties relied, and unambiguously state that the buyer didn't rely on statements outside the contract in deciding to enter into the agreement, they said.

While the rulings have led to a number of law firm client alerts, they aren't expected to significantly change the way M&A agreements are drafted and negotiated. However, they may lead to increased focus on certain deal aspects and cause some law firms to modify the forms they use to draft transactional documents, the attorneys said.

No ‘Magic Words'

In the first ruling—Prairie Capital III v. Double E Holding Corp., 2015 BL 386569—the chancery court in November 2015 declined to allow a buyer to pursue certain fraud claims against the seller based on representations made outside the agreement. In doing so, the court rejected an argument that the agreement failed to affirmatively disclaim reliance on extra-contractual representations. Instead, the court found that the parties' contract language amounted to a clear anti-reliance clause.

The Prairie decision clarified that no “magic words” are required to implement a non-reliance provision that conveys a buyer didn't rely on extra-contractual statements, Joseph McLaughlin and Yafit Cohn, attorneys from Simpson Thacher & Bartlett LLP's New York office, told Bloomberg BNA in a joint March 9 e-mail.

The decision also makes clear that a non-reliance provision serves to preclude fraud claims based on extra-contractual omissions as well, they said.

In the second decision—FdG Logistics LLC v. A&R Logistics Holdings Inc., 2016 BL 50399 (31 CCW 71, 3/2/16)—the chancery court distinguished its Prairie ruling in finding that an anti-reliance provision wasn't effective in preventing a buyer from bringing fraud claims for representations made outside the merger agreement because the provision was drafted from the seller's point of view.

A key takeaway from the decisions is that “if a seller wants to stop a buyer from pursuing fraud claims based on information provided outside of the representations and warranties in a contract, the seller should make sure that there is a disclaimer from the buyer stating that it is not relying on that information,” Eli Hunt, a New York-based partner at Latham & Watkins LLP and member of the firm's M&A and private equity practice group, told Bloomberg BNA in a March 9 e-mail.

Similarly, Stephen Glover, a Washington-based partner at Gibson, Dunn & Crutcher LLP and co-chair of the firm's M&A practice, told Bloomberg BNA in a March 8 interview that while the two cases make clear that the buyer can express its intention that it didn't rely on extra-contractual statements in a number of different ways, it is the buyer, rather than the seller, that must say it.

Impact?

The issue of how deal agreements may be drafted to limit the buyer's ability to bring extra-contractual fraud claims has been a focus of M&A practitioners for some time now. Given that the decisions are in line with Delaware case law, they are unlikely to have a significant impact on the way M&A agreements are drafted, McLaughlin and Cohn said.

Following the rulings, Glover noted that attorneys may become even more focused on ensuring that both buyers and sellers have clearly expressed their intentions on what kind of fraud claims may be brought over the transaction.

“Sellers will be much more focused on ensuring that there is a clear statement by the buyer, and not just by the seller, as to what representations and warranties the seller actually is making (and on which the buyer is relying),” Hunt said.

Scott Freeman, a New York-based partner at Sidley Austin LLP and co-leader of the firm's M&A and private equity group, told Bloomberg BNA that his firm adjusted its forms years before the rulings to reflect that the purchaser is expressly affirming that it is relying on nothing other than representations and warranties in the agreement.

“I think people will just mildly adjust their forms to conform to what Delaware is looking for,” he said.

To contact the reporter on this story: Michael Greene in Washington at mgreene@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com

For More Information

The FdG opinion is available at http://src.bna.com/djR.

 

The Prairie Capital opinion is available at http://src.bna.com/djS.

Maximizing the Effectiveness of Non-Reliance Clauses

McLaughlin and Cohn said that taken together, FdG and Prairie show that attorneys seeking to maximize the effectiveness of a non-reliance provision should:

 

• ensure that the non-reliance provision is the product of arm's-length negotiation between sophisticated parties;
• give full and deliberate consideration to the specific representations and warranties to be included in the agreement; and
• ensure that the non-reliance provision eliminates any potential ambiguity in the parties’ intent.