In IAC Search, LLC v. Conversant LLC (f/k/a ValueClick, Inc.), 2016 WL 6995363 (Del. Ch. Nov. 30, 2016), the Delaware Court of Chancery provided a reminder on how potentially-overlooked contractual provisions could have a significant bearing on the types of claims an aggrieved party may bring.
IAC v. Conversant is the progeny of cases decided by the Delaware Court of Chancery examining fraud claims in the mergers and acquisition context. Previously, the court had established in Abry Partners V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032 (Del. Ch. 2006), that “murky integration clauses, or standard integration clauses without explicit anti-reliance representations, will not relieve a party of its oral and extra-contractual fraudulent representations.”
With its decision in IAC v Conversant, the court went a step further in finding that an integration clause in itself is insufficient to bar claims under Delaware law. Rather, an integration clause combined with an affirmative acknowledgment from the buyer is necessary.
IAC had brought a claim asserting that ValueClick fraudulently induced IAC to overpay for one of its subsidiaries by providing false information in a virtual data room. The court, however, dismissed IAC’s fraud claim, finding that the definitive agreement contained an effective disclaimer of reliance on extra-contractual statements, which in turn acted as a waiver of fraud claims under Delaware law.
In reaching its conclusion, the court examined three key provisions in the asset purchase agreement.
1. No Extra-Contractual Representations of Seller:
“Neither the Seller nor any of its Affiliates or Representatives is making any representation or warranty of any kind or nature whatsoever, oral or written, express or implied (including but not limited to, any relating to financial condition, results of operations, assets or liabilities of the Transferred Group), except as expressly set forth in this Article III, as modified by the Disclosure Schedules, and the Seller hereby disclaims any such other representations and warranties.”
2. Acknowledgment by Buyer:
“The Buyer is a sophisticated purchaser and has made its own independent investigation, review and analysis regarding the Transferred Group and the transactions contemplated hereby, which investigation, review and analysis were conducted by the Buyer together with expert advisors, including legal counsel, that it has engaged for such purpose. The Buyer acknowledges that neither the Seller nor any of its Affiliates or Representatives is making, directly or indirectly, any representation or warranty with respect to any data rooms, management presentations, due diligence discussions, estimates, projections or forecasts involving the Transferred Group . . . unless any such information is expressly included in a representation or warranty contained in Article III.” (emphasis added)
3. Integration Clause:
“This Agreement (including the Exhibits and Schedules hereto), the Ancillary Agreements and the Confidentiality Agreement constitute the entire understanding and agreement, and supersede all prior written agreements, arrangements, communications and understandings and all prior and contemporaneous oral agreements, arrangements, communications and understandings between the parties with respect to the subject matter hereof and thereof.”
Although the court considered all three provisions valuable in determining the intent of the parties, the court reasoned that the specific wording used in the buyer acknowledgment and integration provisions was instrumental in disclaiming reliance. “In order to bar fraud claims,” the court explained, “a disclaimer of reliance ‘must come from the point of view of the aggrieved party’ . . . . An assertion from the seller ‘of what it was and was not representing and warranting’ is not sufficient given the law’s abhorrence of fraud.”
Moreover, the court found that the integration clause helped eliminate any potential ambiguity about the agreement’s scope by defining and limiting the universe of information constituting the deal terms, in turn superseding all other information on which IAC might have relied. The court consequently dismissed IAC’s fraud claim, finding that the combination of the integration clause with IAC’s acknowledgment of the information on which it did and did not rely worked in concert to create sufficient evidence of anti-reliance.
There are several drafting takeaways from the case for contracts governed by Delaware law.
1. For the Seller or Target:
a. Include an Affirmative, Comprehensive Buyer Acknowledgment Clause – An acknowledgment clause must be affirmative, from the perspective of the buyer, with a clear statement that the buyer relied on its own investigation and did not rely on any information outside the four corners of the contract. In addition, the clause should state with particularity the buyer’s acknowledgment that no other representations or warranties were made, including with respect to a virtual data room (if applicable), unless the information is expressly included in a representation and warranty. Even better, the clause should include language that the seller shall not be liable for the buyer’s reliance on any information provided during due diligence.
b. Include an Integration Clause – Affirming prior Delaware case law, the court in IAC v. Conversant determined that an acknowledgment clause should be combined with a standard integration clause to bar fraud claims based on extra-contractual statements. With that in mind, an integration clause should accompany a buyer acknowledgment clause to properly limit the documents that constitute the parties’ agreement.
c. No Extra-Contractual Representations Are Not Enough – A statement from the seller that it is not making representations other than those contained in the agreement may not be sufficient to disclaim the buyer’s reliance on extra-contractual representations, even though the no extra-contractual representations provision may be valuable to include for other reasons.
2. For the Buyer:
a. Incorporate Important Information into the Representations and Warranties – If a buyer opts to agree to a non-reliance clause as described above, but nevertheless is relying on certain information regarding the seller or target company that is not then covered in the representations and warranties set forth in the acquisition agreement, such as information in a data room or discussed on a conference call, then the buyer should strongly consider revising the representations and warranties to expressly cover such information.
b. Understand the Extent of the Acknowledgment Clause – A buyer must be mindful of what information is included in a buyer acknowledgment clause. As selling parties aim to draft more comprehensive acknowledgments in an effort to protect themselves, a buyer should confirm that the scope of the acknowledgments does not overreach.
Even though the no extra-contractual representations, acknowledgments and integration clauses ostensibly deal with a similar issue, it is important to keep in mind that each serves an important purpose.