Delaware is well known as a favored jurisdiction for mergers and acquisition deals, and for good reason — the jurisdiction’s business-friendly legal environment offers numerous efficiencies and predictability. Attorneys and their clients alike favor both increasing efficiencies and achieving predictability in how deal documents would be analyzed if there is ever a dispute. As a result, lawyers often draft a plethora of transaction documents under Delaware law, especially if the entities involved are organized in Delaware. These documents typically contain a detailed section of representations and warranties, covering everything from financial performance to legal compliance, as well as other deal-specific and sometimes bespoke items.

The Importance of Survival Clauses

Generally, representations and warranties do not survive post-closing unless the parties include a survival clause in the transaction documents. By doing so, the parties can set a specific period following the closing date during which the representations and warranties will “survive.” This period can be defined by a certain event or action or left open-ended, subject only to the applicable statute of limitations. The survival period of these representations and warranties is critical, as it dictates how long the parties can bring claims for breaches. Additionally, the parties can contract so that certain causes of action only accrue upon the satisfaction of specific conditions precedent, such as discovering the breach and the breaching party’s failure to take remedial action.

Impact of Delaware’s Statute of Limitations

When the survival clause is tied to the state’s statute of limitations, the applicable state law significantly influences the survival period. For instance, under New York law, the statute of limitations for a breach of representations and warranties is six years.^[1] In contrast, and what may come as a surprise to many, Delaware law generally imposes only a three-year statute of limitations for breach of contract claims from the date the cause of action accrues.^[2] This relatively short period can catch practitioners and buyers off guard, especially those more familiar with jurisdictions offering longer statutes of limitations.

Extending the Statute of Limitations

However, Delaware law also provides that an action based on a written contract involving at least $100,000 may be brought within a specified period in the contract, provided it is within 20 years from the cause of action accruing.^[3]

To extend the statute of limitations beyond the default three years under Delaware law, the transaction documents must be explicit. First, the deal must involve at least $100,000. Second, the claim must be based on a written contract. Finally, the written contract must specify a period for claims to accrue. For example, in AssuredPartners of Virginia, LLC v. Sheehan,^[4] and Bear Stearns Mortgage Funding Trust 2006-SL1 v. EMC Mortgage LLC,^[5] the court found that specifying a survival period or accrual conditions can effectively extend the statute of limitations under Delaware law.

Accrual of Cause of Action

Under Delaware law, a cause of action “accrues” at the time of the wrongful act, even if the plaintiff is unaware of the cause of action.^[6] Without language to the contrary, the accrual of a breach of contract claim arising from representations and warranties would commence at the transaction’s closing.^[7] In such cases, if the default statute of limitations period is not extended, claims must be filed within three years of the closing.^[8]

Specifying a Period for Claims to Accrue

To extend the applicable statute of limitations, the transaction documents must specify a period for the claim to accrue. Examples include a specific period, a period defined by an event or action, another document or agreement, or another statutory period, or even an indefinite period.^[9] In Bear Stearns, the court found that the transaction documents effectively extended the statute of limitations by including a survival clause and an accrual clause stipulating that a cause of action accrues only after the breach is discovered and remedial action is not taken.

Insufficient Survival Clauses

However, merely including a survival clause and an opportunity to cure is insufficient to extend the statute of limitations. For example, in Hydrogen Master Rights, Ltd. v. Weston,^[10] the District Court of Delaware ruled that the parties did not intend to extend the limitations period where the purchase agreement did not address claim accrual. Similarly, in Lehman Bros. Holdings, Inc. v. Universal Am. Mortg. Co., LLC,^[11] the Tenth Circuit found that a provision allowing the seller to cure a breach did not extend the statute of limitations as it did not address claim accrual.

Conclusion: Importance of Explicit Intent

Delaware’s statute of limitations is crucial in determining the survival period of representations and warranties in M&A transactions. While the default period is three years, parties can contractually modify this period, providing significant flexibility to both buyers and sellers. By negotiating appropriate survival and accrual periods, the parties can align their interests and risk tolerances. However, it is essential for the parties to specify their intent explicitly in the transaction documents to comply with Delaware law.

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