A common theme in cases before the Delaware Court of Chancery involves a buyer and a seller of a business disagreeing about some aspect of the deal. So it was in the matter of Great Hill Equity Partners IV, L.P. v. SIG Growth Equity Fund I, LLLP, C.A. No. 7906-VCG (Del. Ch. Dec. 3, 2018).
This opinion weighs in at 153-pages and provides extensive factual details especially in the first 90-pages. There were several prior decisions in this case highlighted on these pages, that provide more background information.
The key issues in this post-trial decision relate to whether fraud was proven, and whether damages were established in an amount that exceeded the cap on indemnification claims provided in the agreement of the parties. In addition to allegations of breach of the representations and warranties in the agreement, the case included allegations of fraud, primarily relating to the knowledge of the sellers regarding excessive chargebacks that endangered the business model of the seller.
The legal analysis begins with a review of the claims for indemnification, as well as the argument that due to alleged fraud, the damages should not be limited to the escrow funds established by the merger agreement. See page 91.
Key Takeaways:
· Notably, the court explains that in Delaware the elements of fraud and “fraud in the inducement” are the same. The court expounds at length on the various nuances and subtleties of such claims. See Slip op. at 93 to 97. The court applies those elements and nuances of the claims in an analysis that extends from page 97 to page 134.
· A thorough analysis of the indemnification claims begins at page 134, and the key holdings on the indemnification claims are found at pages 147 to 150.
· Although many indemnification claims and merger agreements have common themes, naturally their precise terms differ. Many indemnification provisions have a cap on damages related to those claims.
Highlights of Court’s Holdings:
In this case, the court read the indemnification provisions to provide exclusive remedies only for specific types of claims, but the clause excluded damages based on fraud, for which the agreement did not provide a cap or limitation. That is, the court explained that when the contract is viewed as a whole, the indemnification language involved exempts fraudsters from the benefits of the negotiated limits on liability. See page 146 (emphasis on the word “fraudsters” in original).
The court also explained that the indemnification provision was part of a bargained-for liability structure that was intended to limit losses only from breaches of representations and warranties, that would be paid for from a fund that was created from the sale proceeds.
Damages for fraud were not limited to those referenced in the indemnification clause. The court explained that this exclusion in the indemnification clause allowed an action to be brought against tortfeasers for damages without the limitations of the indemnification clause. See pages 149 to 150.
SUPPLEMENT: In a recent bench ruling, the Court rejected an argument that the indemnification clause could be used as a broad liability cap, such as for a claim that the payment provision of an agreement of sale was breached–as opposed to a breach of the representations and warranties clause. See Glidepath, Ltd. v. Beumer Corp., C.A. No. 12220-VCL (Del. Ch. Nov. 26, 2018)(Transcript at 4-6). The court referred to the Curo case in the transcript ruling. The advancement aspects of that case were highlighted on these pages. (Yours truly represents Glidepath, Ltd. in a pending earn-out matter.)