A recent decision from the US District Court for the Western District of Virginia reinforces the significance of a comprehensive integration and non-reliance clause in a contract for the sale of a business. In Pyott-Boone Electronics, Inc., Etc. v. IRR Trusts for Donald L. Fetterolf Dated December 9, 1997, et al., 2013 U.S. Dist. LEXIS 6112 (W.D. Va. Jan. 15, 2013), the court, applying Delaware law, dismissed a claim brought by a buyer of a business against the sellers thereof, based on an alleged breach of a full-disclosure representation in the stock purchase agreement (SPA) pursuant to which the business was sold. The court held that an alleged material misrepresentation in certain sales projections provided during the preliminary investigation and negotiations phase of merger discussions did not constitute a breach of the full-disclosure representation, in large part because the non-reliance and integration provisions of the SPA limited the scope of such representation.
Pyott-Boone, the plaintiffs in the suit, alleged that IRR, the defendants, had breached the full-disclosure representation in the SPA1 by virtue of having provided, through investment bankers engaged to solicit interest in a possible acquisition of the sellers‟ business, a document detailing anticipated future sales opportunities for several major distributors of a key business line. Subsequently, Pyott-Boone, IRR and certain others entered into the SPA, which, as the court points out, included "twenty-four pages of express representations and warranties...[and] more than seventy pages of schedules and exhibits, representing the information upon which the parties were to have relied in concluding their agreement."2 The court further notes that despite the comprehensive representations and warranties in the SPA and robust attachments and schedules, neither the distributor analysis nor the information in the analysis were referenced in or attached to the SPA.3
Later, after the acquisition closed (and presumably the business proved to be less successful than anticipated), Pyott-Boone claimed the distributor analysis contained knowing and negligent misrepresentations, and that Pyott-Boone, in justifiably and foreseeably relying on the representations in the distributor analysis, had suffered damages as a result of these misrepresentations. Pyott-Boone contented that the distributor analysis constituted a "statement... furnished...to Buyer pursuant [to the SPA] or in connection with the transactions contemplated [by the SPA]," which either contained an untrue statement of a material fact or a material omission, and thus was within the scope and constituted a breach of the full-disclosure representation.
The court seems to be of the view that even broadly written full-disclosure representations have limitations, and cannot be used to bring in materials and topics not addressed by express representations in an acquisition agreement.
In rejecting this claim, the court identified two other provisions in the SPA that worked together to foreclose this attempted avenue of recovery. The first was the integration clause in the SPA4, which the court held to plainly state that IRR was making no representations beyond those specifically included in the SPA, and the second was the non-reliance clause5, which the court held to specifically disclaim reliance by Pyott-Boone on information provided pursuant to fulfillment of due diligence requests or in preparation for the acquisition. Working together, these two clauses were held to exclude from the scope of the full-disclosure representation "statement[s] provided to a prospective buyer over four months before a deal is ultimately struck." Accordingly, the court concluded that such statements "cannot truly be understood as „pursuant to‟ or in connection with some future hypothetical agreement."
In coming to these conclusions, the court highlighted the fact the SPA was a negotiated agreement between represented and sophisticated parties, and had the parties intended for the distributor analysis to be included in the scope of the SPA, the parties would have done so. Notwithstanding the foregoing admonition, negotiated acquisition agreements do not typically include detailed representations on sales projections, and do not normally attach or incorporate materials such as the distributor analysis, but these materials seem to fall naturally within the types of statements a buyer would intend to be addressed by a full-disclosure representation. In essence, the court seems to be of the view that even broadly written full-disclosure representations have limitations, and cannot be used to bring in materials and topics not addressed by express representations in an acquisition agreement.
This case serves as a reminder to buyers that even a negotiated full-disclosure representation may not provide a meaningful remedy beyond the representations in the agreement.
In coming to its decision, the court also pointed to the fact that the statements at issue were provided in the early stages of the negotiations, through an investment banker whose job was to sell the transaction. As a result, it is not entirely clear the same decision would have been reached had the alleged misrepresentations been included in materials provided in response to specific diligence requests during the later stages of the deal negotiations, even if these materials were not explicitly referenced in the SPA.
From the perspective of a seller, this case highlights the benefits and protections of well-drafted non-reliance and integration clauses, particularly if a buyer is insisting on a broad full-disclosure representation. From a buyer‟s perspective, this case reinforces the need to exercise caution in relying on a full-disclosure representation. The full-disclosure representation in the Pyott-Boone SPA was buyer-favorable, but in harmonizing this provision with the non-reliance and integration clauses, the court seems to give limited meaning to the language that included within the representation‟s scope "statements pursuant [to the SPA]." This case serves as a reminder to buyers that even a negotiated full-disclosure representation may not provide a meaningful remedy beyond the representations in the agreement.