Wording of Reliance Provisions Critical in M&A Deals

By: Mark J. Tarallo

Most negotiated acquisition agreements contain a provisioMJT Headshot Photo 2015 (M0846615xB1386)n that the buyer is relying only on the specific representations and warranties provided by the seller in the purchase agreement, and not any outside documentation.  However, a recent case in the Delaware Chancery Court has made it clear that it is critical that this representation be properly worded in order to protect the buyer.  In FdG Logistics LLC v. A&R Logistics Holdings, Inc., (C.A. No. 9706-CB, February 23, 2016) the Chancery Court let stand certain fraud claims made by the buyer because the “reliance” provision of the Merger Agreement did not include “any affirmative expression by buyer (1) of specifically what it was relying on when it decided to enter the Merger Agreement or (2) that it was not relying on any representations made outside of the Merger Agreement.”  Instead, the Chancery Court ruled that the reliance provision served as merely “a disclaimer by the selling company of what it was and was not representing and warranting.”

The Merger Agreement at issue in FdG Logistics contained a reliance provision that stated:

Except as expressly set forth in this Article 5, the company makes no representation or warranty, express or implied, at law or in equity and any such other representations or warranties are hereby expressly disclaimed …. Notwithstanding anything to the contrary, (a) The company shall not be deemed to make to Buyer any representation or warranty other than as expressly made by the company in this agreement and (b) The company makes no representation or warranty to Buyer … unless also expressly included in the representations and warranties contained in this Article 5….

The Merger Agreement also contained an integration clause providing that:

“This Agreement, the Transaction Documents and the documents referred to herein and therein contain the entire agreement between the Parties and supersede any prior understandings, agreements or representations by or between the Parties, written or oral, which may have related to the subject matter hereof in any way.”

Despite the presence of these provisions, the Chancery Court found that the fraud claims of the buyer (based on extra-contractual statements made to buyer before it entered the Merger Agreement) should survive a motion to dismiss, on the grounds that the Merger Agreement did not contain an affirmative statement  by buyer that the buyer was not relying on any information, materials or documents provided outside of the Merger Agreement.

The Chancery Court’s decision is consistent with its holdings in Anvil Holding Corp. (where the agreement contained similar language and the court allowed the claims to stand) and Prairie Capital III, L.P. v. Double E Holdings Corp, where the court dismissed the fraud claims based on the affirmative statements made by the buyer in the purchase agreement (which stated, in part, that “[i]n making its determination to proceed with the Transaction, the Buyer has relied on (a) the results of its own independent investigation and (b) the representations and warranties of the Double E Parties expressly and specifically set forth in this Agreement” and that “THE BUYER UNDERSTANDS, ACKNOWLEDGES, AND AGREES THAT ALL OTHER REPRESENTATIONS AND WARRANTIES OF ANY KIND OR NATURE EXPRESS OR IMPLIED . . . ARE SPECIFICALLY DISCLAIMED BY THE DOUBLE E PARTIES….”

The holding in FdG Logistics makes it clear that the Chancery Court will continue to evaluate these claims in the context of the statements made by the buyer in the purchase agreement.

For more information, please contact Mark J. Tarallo.

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