Allegations are commonly made that representations outside the four corners of the parties’ agreement about a merger or similar deal were untrue, and the buyer relied to his detriment on them. A recent decision from the Delaware Court of Chancery addresses the types of provisions in an agreement that could bar such claims for misrepresentation based on extra-contractual statements or omissions. In FdG Logistics LLC v. A&R Logistics Holdings, Inc., C.A. No. 9706-CB (Del. Ch. Feb. 23, 2016), the court allowed claims to proceed based on the absence in the parties’ agreement of a provision that restricted the representations on which the buyer relied only to those contained in the agreement.

Key Takeaways:

• The starting point of an analysis about whether claims based on extra-contractual statements or omissions will be barred, must be the precise wording of the representation clauses and the integration clause in the applicable agreements. This starting point explains why the recent decision in Prairie Capital barred fraud claims based on alleged extra-contractual statements, but the instant opinion allowed such claims to proceed.
• Another factually determinative aspect of an analysis of the issue is whether the promises about relying only on the warranties in the agreement are expressed from the point of view of the buyer. That is, in order to bar claims based on statements outside the four corners of the agreement, the provision in the agreement must “reflect a clear promise by the buyer that it was not relying on statements made to it outside of the agreement to make its decision to enter into the agreement” (citing Anvil, 2013 WL 2249655, at *8) (emphasis in original).
• The court in the instant opinion recognized that an opposite conclusion was reached in dismissing fraud claims based on extra-contractual representations in the Prairie Capital case. But unlike in a similar case called Anvil, the court in Prairie found that the provisions at issue in that matter: “reflected an affirmative expression by the aggrieved buyer that it had relied only on the representations and the warranties in the purchase agreement.” Slip op. at 27. See also n. 55 (quoting exact language of the agreement).
• In the instant opinion, the court distinguished Prairie Capital, and found the critical language was similar to the Anvil case to the extent that key language was missing from the integration clause and the representation provisions that did not include an affirmative expression by the buyer of: (1) specifically what it was relying on when it decided to enter the merger agreement or (2) that it was not relying on any representation made outside of the merger agreement. Instead, the representations in the instant matter were disclaimers by the selling company of what it was representing and what it was not representing. Moreover, in the instant opinion the court determined that the integration clause did not contain a clear statement by the buyer disclaiming reliance on extra-contractual statements.
• The court relied heavily on the reasoning in the Abry case which underscored the strong public policy against fraud and the unwillingness of the court to bar a contracting party from asserting claims for fraud unless that contracting party “unambiguously disclaims reliance on such statements.”
• The court referred to the point made in the Prairie Capital case that the disclaimer language need not include any “magical words,” but the disclaimer must be made from the perspective of the party who is making the claim in order to preclude fraud claims for extra-contractual statements.
• The court noted the important fact that the buyer in the Abry case did not seek relief based on extra-contractual representations, but instead amended its complaint to premise its claims solely upon alleged misrepresentations in the agreement itself.

Free Supplemental Commentary: A complete understanding of this opinion and the key issue it addresses, requires a familiarity with and a comparison of the recent Chancery opinion that dealt with an identical issue in Prairie Capital III, L.P. v. Double E Holdings Corp., 2015 WL 7461807 (Del. Ch. Nov. 24, 2015), highlighted on these pages. Also, in order to master this issue, one needs to be familiar with two other cases listed in this post. The only practical way to distinguish between the cases is the precise wording of the integration clauses and the representation clauses in the agreements considered by these cases, regarding whether the provisions sufficiently and specifically expressly disclaimed reliance on extra-contractual statements, or if the agreement confined the universe of reliance in an affirmative manner to the four corners of the agreement. See Abry Partners V, L.P. v. F & W Acquisitions LLC, 891 A.2d 1032 (Del. Ch. 2006); and Anvil Hldg. Corp. v. Iron Acquisition Co., Inc., 2013 WL 2249655 (Del. Ch. May 17, 2013). See also cases cited at footnotes 47 and 48 of the FdG opinion.

Other Noteworthy Principles of Law for Corporate and Commercial Litigation:

• The court rejected claims based on the Delaware Securities Act because the buyer did not establish the requisite factual nexus between the challenged merger and Delaware, needed to trigger an application of the Act. The court rejected as unreasonable the arguments that the Act applied in this case because to do so would lead to the “bizarre result” of converting a blue-sky statute intended to regulate intrastate securities transactions into one that would regulate interstate securities transactions. In addition, the court rejected the use of a statute allowing for the parties to agree that Delaware law would apply as a way to bootstrap an application of the Act.
• That statute referred to is useful to know about – – independent of this case: Section 2708 of Title 6 of the Delaware Code allows parties to choose Delaware law to govern their agreement to provide certainty to the parties who are subject to jurisdiction in Delaware, to ensure their choice of Delaware law will be respected. The statute was intended to preempt the analysis in the Restatement (Second) of Conflict of Laws, that there exists a substantial relationship between the state and the parties, and that the application of the law of Delaware would not be contrary to any fundamental policy of the state. A prerequisite for the application of the statute is that the contract must involve $100,000 or more.
• As part of this opinion, the court also granted summary judgment to the seller based on the terms of the agreement for payment of a tax refund that was earned prior to the merger, but received by the buyer after the merger. The court did not address, and apparently none of the parties raised the issue of, whether a claim for payment of money was outside the scope of the equitable jurisdiction of the Court of Chancery.