The Delaware Court of Chancery recent provided explicit guidance to drafters of M&A agreements and those that litigate such agreements, to the extent that it provides clarion instruction on the prerequisites for contractual clauses that will bar extra-contractual claims for fraud. In the case styled ChyronHego Corporation v. Wight, C.A. No. 2017-0548-SG (Del. Ch. July 31, 2018), the court dealt with the familiar claims of fraud arising from a corporate acquisition–and how such claims may be avoided.
The opinion provides many important articulations of Delaware law relating to misrepresentations alleged to have been made in connection with the purchase or sale of a company. The most noteworthy iterations of Delaware law include the following:
- Delaware law allows parties to identify the specific information on which a party has relied, and forecloses reliance on other information. See footnote 51 and accompanying text (citing Prairie Capital III, L.P. v. Double E Holding Corp., 131 A.3d 35, 50 (Del. Ch. 2015)(highlighted on these pages)).
- In order for an anti-reliance provision to be effective, it must be unequivocally clear. By contrast, “Standard Integration Clauses” without explicit anti-reliance representations, will not relieve a party of its oral and extra-contractual fraudulent representations. Slip op. at 12 (citing Abry Partners V, L.P. v. F&W Acquisition LLC, 891 A.2d 1032, 1050 (Del. Ch. 2006) (highlighted on these pages)).
- The court emphasized that in order for anti-reliance language to be enforceable, “the contract must contain language that, when read together, can be said to add up to a clear anti-reliance clause by which the plaintiff has contractually promised that it did not rely upon statements outside the contract’s four corners in deciding to sign the contract.” See footnote 55 and accompanying text (citing Kronenberg v. Katz, 872 A.2d 568, 593 (Del. Ch. 2004)).
- Regarding the particular facts of this case, the court reviewed the entirety of the contract in context, and in particular analyzed in combination the following clauses: (i) a standard integration clause; together with (ii) an exclusive remedies clause; (iii) a clause defining excluded liabilities; (iv) an indemnification provision; and, significantly (v) an expressly articulated anti-reliance clause–that the court quoted on page 13 of the opinion.
- The court also relied on the reasoning of the Prairie Capital case, linked above, which involved similar contract language that included express anti-reliance provisions. See Slip op. at pages 14 and 15.
- The court also quoted the reasoning in the Abry Partners case, linked above, that defines the limits, based on Delaware public policy, of an anti-reliance provision. Delaware courts will not condone an anti-reliance provision that one attempts to use in order to: (1) protect a seller from liability for making false representations in a contract; or (2) avoid liability for knowledge that representations in a contract are false. See page 25. See also footnote 100 which noted the truism that knowledge or false statements by a corporate agent can be imputed to the corporation itself.