On November 30 2016 Vice Chancellor Bouchard of the Delaware Court of Chancery issued an opinion that provides additional guidance on how the inclusion of certain key provisions in a purchase agreement can protect a seller against an extra-contractual fraud claim asserted by a buyer in connection with an acquisition transaction.(1) To minimise a seller's exposure to a potential extra-contractual fraud claim, a purchase agreement should contain the following provisions:
- a buyer's disclaimer of reliance on extra-contractual representations;
- a buyer's acknowledgment that the seller has made no such representations; and
- a release of the seller from any liability arising out of misstatements made during due diligence.
In the suit, plaintiff IAC Search asserted that ValueClick fraudulently induced IAC Search to overpay for one of ValueClick's subsidiaries by providing false information concerning such subsidiary's ad sales in documents placed in an electronic data room and in statements that ValueClick made in response to information requests in a "diligence tracker". Importantly, while the ultimate purchase agreement contained representations concerning certain financial results and performance metrics of the subsidiary in question, the parties chose not to incorporate the allegedly fraudulent information into an express contractual representation.
Bouchard's decision to grant ValueClick's motion to dismiss IAC Search's fraud claim hinged on three key provisions of the purchase agreement:
- The agreement contained an express disclaimer by ValueClick of any extra-contractual representations and warranties.
- IAC Search acknowledged that ValueClick was making no representations concerning information provided during due diligence, unless such information was included in an express representation and warranty in the purchase agreement. Bouchard found this provision to be "critical" because it defined in precise terms from IAC Search's perspective the universe of information on which IAC Search relied and did not rely when it entered into the purchase agreement.
- The purchase agreement contained a standard integration clause defining the universe of documents that made up the parties' understanding of the terms of the transaction.
In conclusion, Bouchard found that the integration clause and the buyer acknowledgment clause added up to a "clear anti-reliance clause to bar fraud claims based on extra-contractual statements made during due diligence". Notably, the purchase agreement included no release of the seller from liability for misstatements made during the due diligence process, and the opinion noted that the absence of such a release made this a "closer call" than if such a release had been included.
Although the Delaware Court of Chancery has noted in the past that there are "no magic words", this case provides helpful drafting guidance on how to minimise the risk of extra-contractual fraud claims in the context of a sale transaction.
For further information on this topic please contact John Sorkin or Larissa R Smith at Ropes & Gray LLP office by telephone (+1 212 596 9000) or email (firstname.lastname@example.org or email@example.com). The Ropes & Gray LLP website can be accessed at www.ropesgray.com.
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