A series of cases in 2013 refined the law in Delaware relating to the enforceability of non-reliance clauses. Non-Reliance clauses are generally intended to limit a buyer’s ability to make fraud claims based upon representations made outside of the acquisition agreement (e.g., in diligence materials in the data room, spoken in meetings). Based upon previous case law, a properly drafted non-reliance clause would be enforced in Delaware to bar fraud claims that were based upon representations made outside of the four corners of the acquisition agreement. Three cases in 2013 challenged existing case law and we expect will impact the drafting and negotiation of non-reliance provisions.
Anvil Holding v. Iron held that a non-reliance provision that includes only a statement by the seller that they are making no other representations is not sufficient to bar an extra-contractual fraud claim under Delaware law. The court held that a buyer must, in the applicable agreement, affirmatively disclaim reliance upon extra-contractual representations for the language to bar fraud claims (clarifying the 2012 contrary holding in RAA Management v. Savage Sports Holdings). Pyott-Boone Electronics Inc. v. IRR Trust discussed the inherent tension between a broadly written full-disclosure rep (the so-called “10b-5 rep”) and a non-reliance provision and is a warning to drafters to ensure that these two provisions are consistent and clear. Finally, Transdigm v. Alcoa Global Fasteners held that a non-reliance provision will not bar extra-contractual fraud claims that are based upon active concealment of material information if the non-reliance provision does not expressly disclaim reliance on extracontractual omissions.
Recent studies show that the majority of private-target acquisitions include some form of non-reliance clause (72% of deals in the 2011 ABA Private Target Deal Points Survey and 52% of deals in the 2012 SRS M&A Deal Terms Study included some form of non-reliance or no other representation clause). Regardless of which side of the table you sit, this issue will be frequently negotiated. Staying on top of the current state of the law in this area is crucial to avoiding significant unintended consequences. We encourage all M&A professionals to be aware of the holdings from these cases and to ensure that their non-reliance provisions are drafted appropriately.