A recent amendment to Delaware law clarifies certain statute of limitations rules, providing parties with increased flexibility to control survival periods for acquisition agreement indemnity provisions and related breach-of-contract claims.
The amendment to the Delaware General Corporation Law (the “DGCL”) is described below, along with drafting tips for successfully incorporating these new concepts in your indemnification provisions.
Delaware Statute of Limitations for Breach-of-Contract Claims
Under Delaware law, breach-of-contract claims are generally subject to a three-year statute of limitations period (or four years, in the case of a contract governed by the UCC). Recent case law from the Delaware Court of Chancery highlighted the application of this restriction to the representations and warranties in an acquisition agreement. Accordingly, parties could not contractually agree to a longer claims period, even for breaches of certain “fundamental” representations and warranties, for which parties often want to extend the time period in which indemnity claims may be raised. In response, Delaware recently amended its code by adopting §8106(c), which expressly permits parties to a contract involving at least $100,000 to contractually extend the time period for making claims, up to a maximum of 20 years.
Drafting Tips for Claims Periods in Acquisition Agreements
- The clearest way to extend the claims period beyond 3 years is to state a specified time period (e.g., “the fifth anniversary of the Closing Date”).
- Using the word “indefinitely” is expected to be interpreted in Delaware as an intent to extend the claims period to the longest permitted time and should result in a claims period that expires on the 20th anniversary of the Closing Date.
- Using “statute of limitations” to define the claims period could result in defaulting to the existing 3 year statute of limitations period for breach of contract claims under Delaware law or, depending on how drafted, could result in the application of another period.
- Using the phrase “applicable statute of limitations” is, because of prior case law, expected to default to the original 3 year statute of limitations.
- Adding a parenthetical such as “(as used in this Section [___], “statute of limitations” does not mean the three year statute of limitations applicable to a claim for breach of contract)” will indicate an intent to extend the claims period beyond three years. What the claims period will be will depend on the words used to modify “statute of limitations”.
- Using the phrase “statute of limitations applicable to the subject matter of the underlying representation” is inherently ambiguous as applied to most representations (what does it mean when applied to the “Material Contracts” representation, for example).
Given the various approaches parties take on these provisions, we encourage you to work with our Cooley M&A team on specific questions regarding these provisions.
doubt at all as to whether a contemplated communication or action is permissible.