Yesterday in my Mergers and Acquisitions class we were discussing confidentiality agreements and working our way more or less line by line through a form agreement when we came to this clause:
The Recipient understands and agrees that none of the Disclosing Party, the Company or any of their respective Representatives: (a) have made or make any representation or warranty hereunder, expressed or implied, as to the accuracy or completeness of the Evaluation Material or (b) shall have any liability hereunder to the Recipient or its Representatives relating to or resulting from the use of the Evaluation Material or any errors therein or omissions therefrom.
So I asked (mostly rhetorically, because I don't really do Socratic): Would this waiver immunize the disclosing Seller from liability for intentionally misleading material?
The answer, of course, is "yes." As I noted (I thought non-controversially), Delaware courts have interpreted such disclaimers as clearly and unambiguously including any inaccurate information attributable to intentional fraud. As a result, this language protects the disclosing party (typically the seller or target) from liability for evaluation materials that are intentionally false or misleading.
This is an important issue because, as Michelle DiCintio explains:
Claims of misrepresentation can arise not only after a purchase agreement is signed or a transaction consummated, but even when the negotiations break down and an agreement is never executed. Buyers can incur significant costs pursuing an acquisition; if negotiations fall apart before a definitive agreement is reached and the buyer believes the seller made misrepresentations during the process that mislead the buyer into continuing to incur such costs, the buyer may seek to recoup these expenses from the seller.
The Delaware precedents, however, make clear that "potential buyers ... have very limited, if any, recourse or remedies against a seller in connection with a potential transaction until a definitive agreement is signed." And then they only have remedies if the written representations or warranties in the definitive are misleading.
My students are usually a pretty quiet group, but this got some of them a little riled. A number of people pressed my claim, asserting that surely the law does not allow one to waive fraud claims.
Do you share my student's reservations?
If so, let me point you--as I did my students--to the Delaware Supreme Court decision in RAA Management LLC v Savage Sports Holdings Inc., 45 A.3d 107 (Del. 2012), which held that the following confidentiality clause:
You [RAA] understand and agree that no contract or agreement providing for a transaction between you and the Company [Savage] shall be deemed to exist between you and the Company unless and until a definitive Sale Agreement has been executed and delivered, and you hereby waive, in advance, any claims ... in connection with any such transaction unless and until you shall have entered into a definitive Sale Agreement. (Emphasis in original)
precluded RAA from "asserting any fraud claims against [Savage] under Delaware law." Id. at 113.
As a Potter Anderson memo on the case observed:
RAA first argued that the NDA language should be interpreted to limit RAA’s non-reliance disclaimer to barring claims based on negligence or mistake, but not to extend to fraudulent misrepresentations. The Court, however, found that the NDA’s language made no such distinction and rejected RAA’s argument as meritless. In the alternative, RAA argued that the NDA language was at least ambiguous as to whether it created an exception for inaccurate or incomplete information attributable to fraud. In weighing this claim, the Supreme Court turned to two prior Court of Chancery cases that had enforced NDA provisions with non-reliance disclaimers that were virtually identical to those at issue in this case – Great Lakes Chemical Corp. v. Pharmacia Corp., 788 A.2d 544 (Del. Ch. 2001) and In re IBP, Inc. Shareholders Litigation, 789 A.2d 14 (Del. Ch. 2001). Affirming those cases, the Supreme Court held that the relevant language expressly barred RAA’s fraud claims.
Indeed, as the Cort explained:
RAA acknowledged that in the event no final “Sale Agreement” on a transaction was reached, Savage would have no liability, and could not be sued, for any allegedly inaccurate or incomplete information provided by Savage to RAA during the due diligence process. [Id. at 115. Emphasis in original.]
Quoting an earlier opinion by Justice Jack Jacobs, the Court explained that:
Were this Court to allow [the buyer] to disregard the clear terms of its disclaimers and to assert its claims of fraud, the carefully negotiated and crafted Purchase Agreement between the parties would ... not be worth the paper it is written on. To allow [the buyer] to assert, under the rubric of fraud, claims that are explicitly precluded by contract, would defeat the reasonable commercial expectations of the contracting parties and eviscerate the utility of written contractual agreements.
The Court specifically rejected the sort of policy arguments some of my students wanted to make:
RAA argues that this Court should decline to enforce the agreed-upon language of the non-reliance clauses in the NDA on policy grounds. RAA submits that the “the general rule prohibits parties from using contracts to shield themselves from liability for their own fraud....”
The court rejected that argument, citing "Delaware's public policy in favor of enforcing contractually binding, written disclaimers of reliance on representations outside of a final sale agreement." Id. at 116-17. The court also cited federal precedent interpreting New York law, which reached the same result:
The Second Circuit, in discussing the rationale underlying Danann, has emphasized the principle that where parties, particularly sophisticated ones ..., have undertaken certain obligations—and at the same time expressly limited those obligations—the courts should not normally interfere with those choices. Danann therefore stands for the principle that where the parties to an agreement have expressly allocated risks, the judiciary shall not intrude into their contractual relationship.... [Id. at 118, quoting Warner Theatre Assocs. Ltd. P'ship v. Metro. Life Ins. Co., 1997 WL 685334 (S.D.N.Y. Nov. 4, 1997), aff'd 149 F.3d 134 (2d Cir.1998).]
The federal judge who wrote the quoted opinion was no less than District Court Judge (now Supreme Court Justice) Sonia Sotomayor.
Ms. DiCintio observes that the take home lesson is that:
A buyer could try to protect itself in one of the following ways:
require that the standard non-reliance and waiver clauses that are ordinarily included in NDA be omitted;
have the seller represent and warrant that its disclosures during due diligence are accurate and complete;
have an exception to the non-reliance provisions that would hold the seller liable for fraudulent or intentionally inaccurate information; or
- delay relatively expensive aspects of the due diligence review until later in the due diligence process when a deal is more certain.
On the other side, sellers of businesses should ensure that their NDAs contain standard broad disclaimers of reliance and waivers of claims clauses and resist making any changes to these clauses.
My educated guess is that sellers will usually win that argument. Waiver seems to be the commercially accepted result. As Samuel Peca observes:
Buyers ... have generally always assumed the risk that they would spend significant costs diligencing a target only to discover that all was not what it seemed.
In any case, it's hard for me to disagree with friend of the blog and top Delaware lawyer Francis Pileggi, who observed--after a detailed analysis of the case that you ought to go read--that:
Those involved in the drafting of nonreliance clauses and those who seek to enforce or defend agreements with disclaimers designed to prevent claims of misrepresentation based on statements or omissions outside of a contract, need to read this opinion.
