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2. FdG Logistics LLC v. A&R Logistics Holdings, Inc., 131 A.3d 842, 845 (Del. Ch. Feb. 23, 2016), aff'd sub nom. 148 A.3d 1171 (Del. 2016)
In order to foreclose a claim for fraudulent inducement, a nonreliance clause in an acquisition agreement must set forth an affirmative expression of nonreliance by the buyer, and not merely a disclaimer by the seller of what the seller was or was not representing.
This case arose from the sale of a trucking company (Company) by affiliates of FdG Associates LP, a private equity fund (Seller), to an affiliate of A&R Logistics Holdings Inc., a transportation and logistics company (Buyer). Seller initiated the action in order to recover a preclosing tax refund. Buyer responded with counterclaims for indemnification, violation of the Delaware Securities Act, common law fraud and unilateral mistake. This summary focuses on Buyer's fraud claim, which was based on extra-contractual statements made to Buyer before it entered into the merger agreement. In denying Seller's motion to dismiss the fraud claim, the court held that the merger agreement did not contain an affirmative disclaimer of reliance by Buyer that was sufficient to preclude Buyer from asserting a fraud claim based on representations outside the four corners of the merger agreement.
Buyer's fraud counterclaims involved assertions that after the merger closed, Buyer discovered an extensive series of illegal and improper activities that were concealed from it during pre-merger due diligence. These activities included matters such as falsification by truck drivers of hours-of-service logs, manipulation of scale tickets and time stamps, environmental spills, falsely reporting regular maintenance as capital expenditures and fraudulently charging customers for washes that were not performed. In analyzing Buyer's claims, Chancellor Bouchard listed the following elements of a fraud claim under Delaware: "."2 Seller argued that Buyer could not establish justifiable reliance in light of Section 5.27 and 10.7 of the merger agreement.
Section 5.27 set forth a disclaimer by the Company of any representation or warranty outside of the merger agreement. It read as follows:
"EXCEPT AS EXPRESSLY SET FORTH IN THIS ARTICLE 5, THE COMPANY MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AT LAW OR IN EQUITY AND ANY SUCH OTHER REPRESENTATIONS OR WARRANTIES ARE HEREBY EXPRESSLY DISCLAIMED INCLUDING ANY IMPLIED REPRESENTATION OR WARRANTY AS TO CONDITION, MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE. NOTWITHSTANDING ANYTHING TO THE CONTRARY, (A) THE COMPANY SHALL NOT BE DEEMED TO MAKE TO BUYER ANY REPRESENTATION OR WARRANTY OTHER THAN AS EXPRESSLY MADE BY THE COMPANY IN THIS AGREEMENT AND (B) THE COMPANY MAKES NO REPRESENTATION OR WARRANTY TO BUYER WITH RESPECT TO (I) ANY PROJECTIONS, ESTIMATES OR BUDGETS HERETOFORE DELIVERED TO OR MADE AVAILABLE TO BUYER OR ITS COUNSEL, ACCOUNTANTS OR ADVISORS OF FUTURE REVENUES, EXPENSES OR EXPENDITURES OR FUTURE FINANCIAL RESULTS OF OPERATIONS OF THE COMPANY UNLESS ALSO EXPRESSLY INCLUDED IN THE REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS ARTICLE 5, OR (II) EXCEPT AS EXPRESSLY COVERED BY A REPRESENTATION AND WARRANTY CONTAINED IN THIS ARTICLE 5, ANY OTHER INFORMATION OR DOCUMENTS (FINANCIAL OR OTHERWISE) MADE AVAILABLE TO BUYER OR ITS COUNSEL, ACCOUNTANTS OR ADVISORS WITH RESPECT TO THE COMPANY."
Section 10.7 set forth an integration clause that read as follows: "This Agreement, the Transaction Documents and the documents referred to herein and therein contain the entire agreement between the Parties and supersede any prior understandings, agreements or representations by or between the Parties, written or oral, which may have related to the subject matter hereof in any way."
In analyzing whether these two sections were sufficient to preclude justifiable reliance by Buyer, Chancellor Bouchard relied on the analysis of then-Vice Chancellor Strine in Abry P'rs V, L.P. v. F&W Acquisition LLC.3 In Abry, Vice Chancellor Strine considered the need to strike a balance between the competing public policies of holding sophisticated parties to the terms of their contracts yet protecting against fraud. With regard to the former, Vice Chancellor Strine noted the problem of a party that has agreed to a clearly drafted integration clause that precludes reliance on representations outside the negotiated agreement, then brings a fraudulent inducement claim on the basis of representations outside the agreement. With regard to the public policy of protecting against fraud, Vice Chancellor Strine noted the problem of insulating a party from liability for a counterparty's reliance on fraudulent statements outside of the written agreement. Vice Chancellor Strine balanced these two competing public policies by only permitting fraud claims where the integration clauses contain a clear statement that the parties disclaim reliance on extra-contractual statements:
"Murky integration clauses, or standard integration clauses without explicit antireliance representations, will not relieve a party of its oral and extra-contractual fraudulent representations. The integration clause must contain 'language that... can be said to add up to a clear antireliance clause by which the plaintiff has contractually promised that it did not rely upon statements outside of the contract's four corners in deciding to sign the contract.'"4
In FdG Logistics, Chancellor Bouchard then illustrated the type of clear nonreliance statement that is required by reference to two recent decisions. Chancellor Bouchard noted that in Anvil Holding Corp. v. Iron Acquisitions Co.,5 the applicable purchase agreement language provides that neither the subject company nor any seller "makes any other express or implied representation or warranty with respect to the Company" and that the agreement "constitutes the entire Agreement among the Parties." Chancellor Bouchard noted that the Anvil court refused to dismiss the fraud claims because this language did not reflect a clear nonreliance promise by the Buyer. In other words, the nonreliance intent has to be clear, and the nonreliance statement must come from the Buyer.
The second decision referenced by Chancellor Bouchard was the 2015 case, Prairie Capital III, L.P. v. Double E Holdings Corp.6 In dismissing the buyer's fraud claim, the Prairie court found that the "exclusive representations" language reflected the necessary affirmative representation by the buyer that it had only relied on the representations and warranties in the purchase agreement. Moreover, the fact that the exclusive representations language was phrased in terms of buyer having relied only on the representations and warranties in the purchase agreement, as opposed to buyer not having relied on any representations and warranties other than those in the purchase agreement, did not render the antireliance language ineffectual. The Prairie court noted that "Delaware law does not require magic words."
In turning to the FdG Logistics' merger agreement, Chancellor Bouchard found that, similar to Anvil but unlike Prairie, there was not:
"Any affirmative expression by Buyer of (1) specifically what it was relying on when it decided to enter the Merger Agreement or (2) that it... was not relying on any representations made outside of the Merger Agreement. Instead, Section 5.27 amounts to a disclaimer by the selling company... of what it was and was not representing and warranting. Moreover, the integration clause contained in Section 10.7 merely states in general terms that the Merger Agreement constitutes the entire agreement between the parties, and does not contain an unambiguous statement by Buyer disclaiming reliance on extra-contractual statements."
This sets forth an important drafting tip: for nonreliance language to be effective, the acquisition agreement must contain (i) an affirmative expression by the buyer (as opposed to merely a disclaimer by the seller), (ii) which specifies what the buyer was relying on, or that the buyer was not relying on representations outside the acquisition agreement. Chancellor Bouchard provided further gloss on what sort of specificity is required in a later decision, which is summarized next.
3. IAC Search, LLC v. Conversant LLC, 2016 WL 6995363 (Del. Ch. Nov. 30, 2016)
Consistent with his decision in FdG Logistics (summarized above), Chancellor Bouchard provides further guidance on what constitutes an effective nonreliance clause.
This decision, in relevant part, involves another ruling by Chancellor Bouchard on a motion to dismiss a fraudulent inducement claim by an aggrieved buyer. The case stemmed from the sale by ValueClick Inc. (Seller) of several subsidiaries to an affiliate of IAC/InterActiveCorp, a public media and internet conglomerate (Buyer). Buyer alleged that Seller provided false performance metrics regarding advertising revenue for one of the subsidiaries during the due diligence process.
In granting the motion to dismiss, Chancellor Bouchard reviewed Sections 3.31, 4.7 and 10.6 of the acquisition agreement. Section 3.31 set forth a disclaimer by Seller of making any extra-contractual representations and Section 10.6 contained a standard integration clause. Section 4.7 set forth the following acknowledgement by Buyer that Seller was not making any representation concerning due diligence information unless contained in an express representation and warranty in the acquisition agreement:
. Nothing in this Section 4.7 is intended to modify or limit any of the representations or warranties of the Seller set forth in Article III."
Chancellor Bouchard found