A recent M&A-related lawsuit in the Delaware Court of Chancery, Roma Landmark Theaters, LLC v. Cohen Exhibition Co., LLC, 2020 WL 5816759 (Del. Ch. Sept. 30, 2020), involved a dispute over a post-closing purchase price adjustment. The Court of Chancery upheld the buyer’s fraud claims on a motion to dismiss, but dismissed the remaining claims, holding that sellers of a company cannot be held liable for alleged breach of the company’s contractual duty to prepare financial statements in good faith, but sellers could be liable for fraud based on the company’s contractual representations.

The litigation in Roma Landmark Theaters arose out of the sale of Landmark Acquisition Corporation (the company) by plaintiffs Roma Landmark Theaters, LLC and MCC Entertainment LLC (the sellers) to defendant Cohen Exhibition Company LLC (the Buyer). The parties disagreed over post-closing purchase price adjustments arising out of the sale of the sellers’ membership interests in the company.

The securities purchase agreement (SPA) required the company (but not the sellers) to provide a “preliminary closing statement” upon which the purchase price adjustment would be determined at closing, subject to a final closing statement to be provided post-closing. The SPA also included a dispute resolution mechanism, which required the parties to submit any dispute over post-closing price adjustments to an independent accounting firm for a binding resolution and a binding determination as to the distribution of escrowed funds.

The independent accounting firm ruled in the sellers’ favor, and the sellers then filed suit in the Court of Chancery, seeking confirmation of the decision and release of escrowed funds. The Buyer counterclaimed, arguing that the sellers breached an obligation under the SPA to deliver a “preliminary closing statement” prepared in good faith, on which the purchase price was partially based, and alleging that the Sellers fraudulently omitted information from financial statements.

The court dismissed the buyer’s contract claims against the sellers because, under the terms of the SPA, only the company, not the sellers, provided representations and warranties regarding the company’s financials. The court held that the buyer cannot state a claim for breach of contract because the obligation to provide the “preliminary closing statement” was the company’s (as opposed to the sellers’), and that the buyer was not entitled to representations and warranty protections from the sellers beyond those afforded under the plain terms of the SPA. The court also dismissed the buyer’s implied covenant claim because the buyer had not alleged an implied obligation or contractual gap in the parties’ SPA.

The court, however, held that the sellers could be held liable for fraud based on the company’s alleged contractual misrepresentations, although the SPA’s anti-reliance clause barred some of the buyer’s fraud claims. The court upheld a part of the buyer’s fraud claims at the pleadings stage because the buyer had pled with sufficient particularity (opposed to speculative conclusions unsupported by fact) that the sellers knowingly omitted management bonus and medical claim liabilities from interim financial statements.

The court rejected the buyer’s other fraud claims and granted the sellers’ motion to dismiss as to those claims.

First, the court granted the motion to dismiss to the extent that the buyer’s fraud claim was based on allegations that the sellers fraudulently omitted “miscellaneous liabilities” from “interim financial statements” provided to the buyer in connection with their acquisition of the company, reasoning that the buyer did not allege that the sellers knew of the liabilities and the claim was therefore not pleaded with particularity.

Second, the court granted the sellers’ motion to dismiss the buyer’s counterclaim that the sellers fraudulently caused misstatement of financials in the “preliminary closing statement” provided to the buyer in connection with the acquisition of the company because the buyer disclaimed reliance on that statement and the SPA had explicitly excluded that account from the relevant calculation.

Finally, the court granted the sellers’ motion to dismiss the buyer’s fraudulent concealment counterclaim because the supporting allegations were conclusory and lacked particularity as required by Court of Chancery Rule 9(b). The court reasoned that, to allege fraudulent concealment, the buyer must allege that the sellers “took some action affirmative in nature designed or intended to prevent, and which does prevent, the discovery of facts giving rise to the fraud claim, some artifice to prevent knowledge of the facts or some representation intended to exclude suspicion and prevent inquiry.” The court held that the buyer failed to meet such pleading requirements.

Key takeaways

  • Based on the court’s decision in Roma Landmark Theaters, sellers of a company cannot be held liable for alleged breach of the company’s contractual duty to prepare financial statements in good faith, but sellers may be liable for fraud based on the company’s contractual representations.
  • To plead fraud under Delaware law, a buyer must satisfy the heightened pleading standard of Court of Chancery Rule 9(b), which requires fraud be pled with particularity, opposed to speculative conclusions unsupported by fact.
  • To allege fraudulent concealment, a buyer must allege that the seller took some affirmative action designed or intended to prevent, and which does prevent, the discovery of facts giving rise to the fraud claim.