Buyer’s Disclaimed Reliance on Any Representations and Warranties Outside SPA Does Not Bar Claim for Fraudulent Concealment of Material Information
Transdigm Inc. v. Alcoa Global Fasteners, Inc., C. A. No. 7135-VCP (May 29, 2013).
Issue Addressed: Does a buyer’s disclaimed reliance on representations and warranties outside of the stock purchase agreement bar the buyer’s claim for fraudulent concealment of material information?
Short Answer: No.
Brief Discussion: This is a dispute between parties to a stock purchase agreement (“SPA”). TransDigm is the parent company of McKechnie Aerospace Investments, Inc. and McKechnie Aerospace (Europe) Ltd. McKechnie USA was the sole shareholder of Valley-Todeco, Inc., and McKechnie UK was the sole shareholder of Linread Ltd. ( the “Fastener Subsidiaries”). The buyer/defendant Alcoa Global Fasteners, Inc. (Alcoa”) purchased all of the outstanding shares of the Fastener Subsidiaries pursuant to an SPA executed on January 28, 2011. The SPA contained language about disclosure of information and reliance. In particular, Section 5.8 of the SPA stated in relevant part:
Buyer has undertaken such investigation and has been provided with and has evaluated such documents and information as it has deemed necessary to enable it to make an informed decision with respect to the execution, delivery and performance of this Agreement and the transactions contemplated hereby. Buyer agrees to accept the Shares without reliance upon any express or implied representations or warranties of any nature, whether in writing, orally or otherwise, made by or on behalf of or imputed to TransDigm or any of its Affiliates, except as expressly set forth in this Agreement.
One of Linread‘s most important customers, Airbus, had a contract with Linread covering the period January 1, 2005 to December 31, 2008, which was later extended to December 31, 2012. During due diligence, Alcoa asked Transdigm specific questions to “understand the scope of Linread‘s business with Airbus and the strength and potential for future success of the Linread–Airbus business relationship.” Unbeknownst to Alcoa, Transdigm was having issues with Airbus about pricing and the future of the Airbus business and “[a]lthough TransDigm had information at that time that would have been responsive to Alcoa‘s questions, TransDigm intentionally did not reveal some of that information in its responses.” Indeed, it was not until after the SPA was executed that Alcoa learned that Airbus was unhappy about pricing and that McKechnie UK‘s CEO verbally offered (and Airbus had accepted) a 5% discount on all lockbolts purchased under the Airbus Contract starting on January 1, 2012. In addition, Airbus indicated that it “seriously was considering moving 50%–55% of its lockbolt business to a European competitor.”
While Alcoa claimed that Transdigm engaged in fraud related to the transaction or misrepresented certain facts in the SPA, it was TransDigm that filed suit seeking reformation and breach of contract on issues unrelated to this motion. Alcoa counterclaimed alleging, among other things, concealment of material information and misrepresentation in the SPA. Transdigm then filed a motion to dismiss those counts in the counterclaim. Alcoa responded by arguing that while in Section 5.8, Alcoa admittedly disclaimed reliance on any extra-contractual representations, the claim for concealment was not based on any extra-contractual representation by TransDigm. Rather, it arose from the intentional and affirmative concealment of material facts and Section 5.8 did not preclude such a claim.
The Court agreed with Alcoa, finding that the counterclaim stated a prima facie claim for active concealment based on the allegations regarding, among other things, conversations between Alcoa and Transdgim where Transdigm representatives were specifically asked about payments relating to Airbus and Transdigm. Those representatives not only failed to say anything about the 5% discount or the threat of Airbus moving its business, they “made an effort to hide this information.” As the Court noted:
Based on these allegations, it appears reasonably conceivable at this preliminary stage of the litigation that Alcoa could prove that the TransDigm representatives who attended the January 6, 2011 meeting were apprised of the information allegedly known to Costello and Brown, among others, and that they intentionally omitted or concealed information from Alcoa. Alternatively, it is also reasonable to infer that, if the TransDigm representatives who attended the January 6, 2011 meeting did not know of the discount and potential loss of Airbus business, their ignorance—and resultant inability to inform Alcoa—was due to the active concealment of the information by Brown and others. Thus, the Counterclaim adequately alleges fraudulent and active concealment of material information.
The Court concluded that Alcoa “conceivably could prevail on its claim for fraudulent and active concealment of material information.” As a result, the Court denied Transdigm’s motion to dismiss those claims but granted Transdigm’s motion to dismiss the misrepresentation claims.