In FdG Logistics v. A&R Logistics (Feb. 23, 2016), the Delaware Court of Chancery held that an antireliance provision in a merger agreement is not effective if it is drafted solely “from the point of view” of the seller rather than the buyer.
An anti-reliance provision is intended to convey that, in determining to proceed with an acquisition, the buyer has relied only on the selling parties’ representations and warranties that are expressly set forth in the acquisition agreement, and has not relied on any other statements made or information provided (or omitted) by the selling parties, whether during due diligence or otherwise. As was confirmed recently in the court’s November 2015 Prairie Capital decision, an effective anti-reliance provision will bar a buyer from bringing post-closing fraud claims based on extra-contractual information (even if the agreement excluded fraud claims from the provision stating that indemnification would be the exclusive remedy and even if the extra-contractual information provided was indeed fraudulent). If the anti-reliance provision in effective, the only fraud claim that would be viable would be for fraud intrinsic in the contract—that is, for an intentional misrepresentation or omission in the representations and warranties.
Chancellor Bouchard held in FdG that, for an anti-reliance provision to be effective in barring a fraud claim, it must be formulated as a statement of the buyer – in effect, a promise by the buyer that it has not relied on anything extrinsic to the contract itself. Because the anti-reliance provision in FdG was formulated solely as a limitation on the seller’s representations and warranties, specifying that the seller had not made any representations and warranties other than those expressly set forth in the agreement, the court denied the selling stockholders’ motion to dismiss the buyer’s fraud claims that were based on the alleged extra-contractual statements made during the negotiation and diligence process, before the buyer entered into the merger agreement.
FdG reaffirms the holding of then-Vice Chancellor Strine (now Chief Justice of the Delaware Supreme Court) in the 2006 Abry Partners decision. In Abry Partners, the then-Vice Chancellor explained that, in balancing the imperatives of holding sophisticated parties to the terms of their contracts and of protecting against the abuses of fraud, “the court will not insulate a party from liability for its counterparty’s reliance on fraudulent statements made outside of an agreement absent a clear statement by that counterparty— that is, the one who is seeking to rely on extra-contractual statements—disclaiming that reliance.”
In the recent Prairie Capital decision, the court also addressed drafting issues relating to non-reliance provisions and stated that “no magic words” are required for the provision to be effective. Specifically, the court held that the provision can be effective whether it is drafted in an affirmative formulation (e.g., “The Buyer has relied only on the representations and warranties set forth in the agreement”) or a negative formulation (e.g., “The Buyer has not relied on anything other than the representations and warranties set forth in the agreement”). FdG now clarifies that, while no magic words are required, the words must be the buyer’s.
- Subtle drafting differences can result in dramatically different consequences. The holding underscores the significant consequences that can follow from subtle differences in the drafting of certain private M&A agreement provisions (including the non-reliance provision).
- An anti-reliance provision will not be effective unless drafted as a statement made by the buyer. Based on FdG, the following provision, which is drafted as a statement by the selling party, would not be an effective anti-reliance provision:
- The Selling Parties have not made any representations and warranties other than the representations and warranties of the Selling Parties that are expressly set forth in this merger agreement.
Any of the following provisions, each of which is drafted as a statement by the buyer, should be an effective anti-reliance provision:
- The Buyer has not relied on any representations and warranties of the Selling Parties other than the representations and warranties of the Selling Parties that are expressly set forth in this merger agreement.
- The Buyer has relied only on the representations and warranties of the Selling Parties that are expressly set forth in this merger agreement.
- The Buyer agrees and acknowledges that the Selling Parties have not made any representations and warranties other than the representations and warranties of the Selling Parties that are expressly set forth in this merger agreement and the Selling Parties shall not have any liability to the Buyer resulting from the Buyer’s reliance on any such information.
Other agreement provisions that support the anti-reliance provision. We note that, to further protect a seller against post-closing fraud claims based on statements made or materials provided, or omissions made, during the due diligence process, in addition to the buyer’s disclaimer of reliance (discussed above), the agreement should include (i) a seller’s disclaimer (i.e., that it has not made representations or warranties other than as expressly set forth in the agreement) and (ii) an integration clause (i.e., that the agreement represents the entire agreement of the parties and supersedes any prior understandings or representations by the parties).
Further discussion of post-closing fraud claims. For further discussion—including practice points for buyers and sellers relating to the breadth of representations and warranties in private merger or sale agreements; fraud “carve-outs” in the exclusive remedies and anti-reliance provisions of agreements; and ideas for other provisions that may mitigate the risk associated with post-closing fraud claims—please see the Fried Frank Private Equity Briefing, Chancery Court Provides Guidance on Post-Closing Fraud Claims by Buyer of Portfolio Company—Prairie Capital v. Double E, Jan. 4, 2016, available on the Fried Frank website.