Delaware Business Litigation Report

Chancery Sustains M&A Fraud Claims Based On Near-Term EBITDA Projections

In re P3 Health Grp. Hldgs., LLC, C.A. No. 2021-0518-JTL (Del. Ch. Oct. 26, 2022)
This recent decision addresses three points of interest relevant to fraud claims.
First, while fraud claims generally involve statements of fact, future projections can support a fraud claim. The statement of future projection must be sufficiently specific, and the plaintiff must plead that the projection was fraudulently conceived. In this case, the Court of Chancery found plaintiff had sufficiently pleaded a fraud claim based on a specific EBITDA projection figure for the current year in which the statement was made. According to the plaintiff, the company missed the projected EBITDA number by roughly $52 million, with a projected EBITDA of $12.7 million and actual year-end results of negative $40 million. Because it was a near-term projection, and one reasonably conceivable inference from the large difference was that the defendant knowingly made a false representation, the Court found the plaintiff sufficiently pleaded a fraud claim based on the EBITDA projection.

Second, Delaware recognizes that parties may disclaim reliance on extra-contractual statements by agreement – known as “anti-reliance clauses.” Here, while the relevant agreement included a provision disclaiming reliance on extra-contractual representations regarding financial performance, that same provision also carved out “claims or allegations relating to fraud or intentional misrepresentations….” Accordingly, the Court held that plaintiff could still bring a fraud claim based on the extra-contractual representation regarding EBITDA projections.

Third and finally, Delaware does not permit parties to exculpate themselves from fraudulent conduct by including “no recourse” provisions in agreements. Here, the underlying agreement included a no recourse provision, which, the Court recognized would prevent the plaintiff’s fraud claim. But following recent precedent (discussed here), the Court found the provision invalid as against Delaware public policy.

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