So far this year, deal parties are approaching M&A with cautious optimism. This series of Cooley M&A blog posts include some brief observations that offer some M&A highlights over the past year and our thoughts for the year to come.
Negotiating Anti-Reliance Language
Buyers continued to assert fraud claims in private deals with increasing alacrity. In a typical claim, a buyer may allege that management provided information during due diligence regarding the company that misrepresented the company’s actual financial condition, and that the buyer relied on those misstatements when it agreed to enter into the transaction.
In Delaware, statements like these that are made outside of the four corners of the acquisition agreement can be disclaimed, but not statements made within the contract’s representations and warranties. Last year, the Delaware court continued to provide additional guidance on what language is, or is not, required to act as an effective “non-reliance” clause to mandate dismissal of the buyer’s fraud claim. In Fdg Logistics (Del. Ch. 2016), which was most recently followed by IAC Search (Del. Ch. 2016), the Court held that a statement by the defendant – usually the seller – disclaiming any extra-contractual representations is not sufficient. Rather, the disclaimer of reliance must come from the point of view of the aggrieved party – usually the buyer. So for a non-reliance clause to be effective, the party asserting fraud must have affirmatively disclaimed reliance on outside statements.
As the incidence of fraud claims continues, sellers are asking for clear disclaimers in order to discourage claims (and the corresponding litigation expenses) from being brought in the first place. Buyers, on the other hand, are resisting their inclusion. Parties on both sides are parsing the language to define the type of fraud being disclaimed, apportion liability based on who committed the fraud, and limit damages to the indemnity in cases of fraud that are not disclaimed. As more fraud cases continue to be brought, expect further detailed negotiation of anti-reliance disclaimer language in 2017.