Action Item: To be effective in protecting a seller, acquisition agreements must contain a clear statement as to the disclaimer of reliance on extra-contractual representations and warranties and such disclaimer must come from the point of view of the buyer. A seller should consider structuring the acquisition agreement to provide (i) a buyer acknowledgement as to no extra-contractual representations or warranties by the seller, (ii) an affirmative disclaimer by the buyer as to extra-contractual statements and omissions, and (iii) an integration provision. Further, any fraud exceptions in the acquisition agreement should be carefully reviewed by the seller for conflict with the anti-reliance disclaimer.
The Delaware Court of Chancery recently held in FdG Logistics LLC v. A&R Logistics Holdings, Inc., 131 A.3d 842 (Del. Ch. Feb 23, 2016), that to effectively disclaim reliance on extra-contractual representations and warranties to bar a buyer’s claim for fraud, the buyer must clearly and affirmatively disclaim such reliance in the acquisition agreement. The FdG Court’s decision reflects the public policy of guarding against fraud while also holding sophisticated parties to the terms of their agreements.
Facts
In FdG, the buyer, a private equity firm, negotiated the acquisition by merger of a trucking company from the sellers. The merger agreement provided for a disclaimer by the target company that it was not making any representations or warranties outside of the merger agreement and an integration provision stating the merger transaction documents contained the entire agreement between the parties and superseded any other understandings, representations, or warranties. After the merger closed, the sellers filed a complaint against the buyer for payment of a tax refund, and the buyer counterclaimed on several counts, including an assertion of common law fraud based on certain misrepresentations and omissions in pre-merger documents supplied by the sellers to the buyer which were not corrected in the due diligence process. The sellers moved to dismiss the fraud counterclaim arguing that because the pre-merger documents were outside the four corners of the merger agreement and the merger agreement included both a general disclaimer on extra-contractual representations and warranties and an integration provision, the buyer could not argue it justifiably relied on any of the pre-merger documents.
Decision
In reaching its holding, the FdG Court affirmed the Delaware Court of Chancery decision in Abry Partners V, L.P. v. F.W. Acquisition LLC, 891 A.2d 1032 (Del. Ch. Feb. 14, 2006), and examined two other recent decisions to demonstrate how the principles articulated in Abry are applied in determining the enforceability of anti-reliance disclaimers and integration provisions. The Abry court stated that “a party cannot promise, in a clear integration clause of a negotiated agreement, that it will not rely on promises and representations outside of the agreement and then shirk its own bargain in favor of a ‘but we did rely on those other representations’ fraudulent inducement claim.” Id. at 1057. From the Abry decision, the FdG Court explained that the difference between a disclaimer from the point of view of a party accused of fraud and from the point of view of a counterparty who believes it has been defrauded is critical because of Delaware’s strong public policy against fraud.
In Anvil Holding Corporation v. Iron Acquisitions Company, 2013 WL 2249655 (Del. Ch. May 17, 2013), the Delaware Court of Chancery applied the principles from Abry in refusing to dismiss a claim of fraud because the anti-reliance disclaimer was not expressed from the buyer’s perspective. The FdG Court stated that a seller’s general disclaimer only “amounts to a disclaimer by the selling company…of what it was and was not representing” and thus does not preclude a claim of fraud by the buyer based on representations made outside of the four corners of the contract. FdG, 131 A.3d at 860. The Anvil Court also noted that to bar a claim for fraud based on extra-contractual representations, an integration provision must demonstrate an unequivocal anti-reliance disclaimer under which a buyer has contractually promised that it relied only on statements made within the four corners of the contract.
In Prairie Capital v. Double E Holding Corp., 2015 WL 7461807 (Del. Ch. Nov. 24, 2015), the Delaware Court of Chancery relied on the same principles from Abry in dismissing fraud claims asserted by a buyer based on extra-contractual representations. The Prairie Court found that the anti-reliance disclaimer, along with the integration provision, reflected the buyer’s affirmative expression that it relied solely on the representations and warranties in the acquisition agreement.
Upon reviewing these precedential cases, the FdG Court denied the seller’s motion to dismiss, finding that the circumstances of FdG were more similar to those in Anvil than Prairie and holding the buyer did not give the requisite affirmative expression (1) as to the specific information it relied on when it entered into the merger agreement or (2) that it was not relying on any representations or warranties made outside of the merger agreement.
Takeaway
Parties to an acquisition agreement can enter into enforceable disclaimers of extra-contractual representations and warranties to bar fraud claims based thereon. To be effective in protecting a seller, the acquisition agreement must contain a clear statement as to the disclaimer of reliance on extra-contractual representation and warranties and such disclaimer must come from the point of view of the buyer. A seller should consider structuring the acquisition agreement to provide (1) a buyer acknowledgement as to no extra-contractual representations or warranties by the seller, (2) an affirmative disclaimer by the buyer as to extra-contractual statements and omissions, and (3) an integration provision. Further, any fraud exceptions in the acquisition agreement should be carefully reviewed by the seller for conflict with the anti-reliance disclaimer.
