Buyers unhappy with the performance of a company or assets purchased frequently assert claims that the seller fraudulently induced the purchase by providing false information of the value of the company or assets in the sale process.
The Delaware Court of Chancery has often addressed whether the language in a disclaimer of extra-contractual representations in a purchase agreement is sufficient to shield a seller from liability for fraud. In these decisions, the court has provided guidance for the language in disclaimers or anti-reliance clauses necessary to avoid claims of fraud based on extra-contractual representations.
To start in Abry Partners V. v. F&W Acquisition, 891 A.2d 1032, 1059 (Del. Ch. 2006), the court ruled that a standard integration clause, barring contract claims based on prior written agreements, and prior or contemporaneous oral agreements, but without explicit anti-reliance language disclaiming reliance on extra-contractual representations, will not shield the seller from liability for fraud.
Further, in FdG Logistics v. A&R Holdings, 131 A.3d 842, 860 (Del. Ch. 2016), the court ruled that a disclaimer must come from the aggrieved party, meaning the buyer who asserts the fraud. Thus, a seller's disclaimer of what it did or did not represent is insufficient by itself to bar a fraud claim based on extra-contractual representations. Lastly, in Praire Capital v. Double E Holding, 132 A.3d 35, 51 (Del. Ch. 2015), the court ruled that to disclaim reliance does not require any "magic words," or even that a disclaimer or anti-reliance clause be styled negatively to deny reliance on extra-contractual representations.
In its most recent decision addressing anti-reliance clauses, IAC Search v. Conversant, C.A. No. 11774-CB (Del. Ch. Nov. 30) (Bouchard, C.), the Court of Chancery held that a plaintiff buyer's acknowledgement, describing the universe of defendant seller's information, on which the buyer relied when entering into a purchase agreement, combined with a standard integration clause, together added up to a "clear anti-reliance clause to bar fraud claims based on extra-contractual statements made during due diligence." Accordingly, the court dismissed the plaintiff buyer's fraud claims for failure to state a claim under Court of Chancery Rule 12(b)(6).
The plaintiff buyer, IAC Search, purchased six subsidiaries of the defendant seller, ValueClick, under terms set forth in the parties' stock and asset purchase agreement. After paying $90 million to purchase the subsidiaries, the buyer asserted that the seller fraudulently induced the buyer to overpay for one of the subsidiaries by providing false data concerning the subsidiary's ad sales during the due diligence process.
The purchase agreement contained express representations by the seller concerning financial disclosures of the subsidiary. But, the buyer's fraud claim was not based on the accuracy of these express representations. Instead, the buyer challenged the accuracy of data concerning the subsidiary's ad sales that seller had provided to the buyer during due diligence, but which data the parties chose not to incorporate into an express representation or warranty in the purchase agreement. A claim of fraud, however, provided the buyer with its best chance to circumvent the indemnification cap on damages under the purchase agreement.
The purchase agreement contained three provisions relevant to whether the language in the disclaimer was sufficient to shield the seller from liability for fraud. First, the seller disclaimed making any extra-contractual representations. Second, the buyer acknowledged that seller was not making any extra-contractual representations about information provided during due diligence unless such information was contained in an express representation or warranty in the purchase agreement. Finally, the parties included a standard integration clause, defining the universe of writings that made up their purchase agreement.
Buyer Acknowledged Seller Representations
The court ruled that the buyer's acknowledgement that the seller was not making extra-contractual representations, combined with the standard integration clause, added up to a clear anti-reliance clause that barred the buyer's fraudulent inducement claims. The court reasoned that by expressly acknowledging that seller was not making any extra-contractual representations about information provided during due diligence, except if such information was contained in an express representation in the purchase agreement, the buyer had affirmatively described the universe of seller's information on which the buyer had relied in its decision to enter into the purchase agreement. The court explained that a disclaimer is not required to be framed negatively, and may instead, state affirmatively what the buyer relied upon to effectively disclaim reliance on extra-contractual representations.
In sum, the court concluded that the combined effect of the buyer's acknowledgement of the universe of information that buyer had relied upon, together with the standard integration clause, was sufficient to bar buyer's fraud claims based on extra-contractual statements made during due diligence. The integration clause defined the universe of writings reflecting the terms of the parties' purchase agreement, and, in turn, the buyer's acknowledgement clause described the universe of due diligence information, on which the buyer had and had not relied in its decision to enter into the purchase agreement. Accordingly, to permit the buyer to now assert a fraud claim based on extra-contractual statements made during due diligence, would "excuse a lie made by [buyer] in writing" that seller had not made any such extra-contractual statements, which would undermine an important Delaware policy of respecting freedom of contract.
IAC Search found that a disclaimer or anti-reliance clause that states affirmatively what the buyer relied upon in entering into a purchase agreement, together with a standard integration clause, is sufficient to bar a fraud claim based on extra-contractual representations. The safer course of action to preclude a claim for fraud, however, is to include both an integration clause and an anti-reliance clause that expressly states that the buyer did not rely upon any extra-contractual statements or information outside of the purchase agreement in its decision to enter into the agreement. •