A recent Delaware Court of Chancery decision addressed the issue of whether a seller was liable for not disclosing the notification it received prior to closing that one or more key customers were terminating their relationship with the seller’s business. Swipe Acquisition Corporation v. Krauss, C.A. No. 2019-0509-PAF (Del. Ch. Aug. 25, 2020). This decision and others cited below must be read by anyone who seeks a deep understanding of Delaware law on this topic.

Key Issue Addressed:

When will a fraud claim survive in connection with a purchase agreement that restricts claims for misrepresentations and limits claims for indemnification? In this case, most of the motion to dismiss was denied, but one of the reasons this decision is noteworthy is because it exposes the lack of a bright-line-rule on this issue when compared to other decisions addressing the same or similar issues–depending on the specific terms of the anti-reliance clause involved and the specific claims of fraudulent misrepresentations or omissions.

Many cases addressing this issue have been highlighted on these pages over the last 15 years. E.g., the Prairie Capital case in which yours truly was one of the counsel involved, and the ChyronHego Corp. decision.

As an indication of how common this issue is, a few days ago the Court of Chancery issued another decision that addressed the titular issue: Pilot Air Freight, LLC v. Manna Freight Systems, Inc., No. 2019-0992-VCS (Del. Ch. Sept. 18, 2020).

But we are fortunate to have a compilation of cases by the highly valuable electronic publication called The Chancery Daily (subscription required) that has compiled cases that have addressed the titular issue and which–though factually determinative to the extent the cases are tethered to their facts–manifest what some readers might describe as a lack of unanimity or at least the lack of a bright-line-test. This topic could easily be the subject of a law review article, but for present purposes, with thanks to The Chancery Daily, in its editions dated September 14, 15, and 17, 2020, the following cases should be consulted for anyone interested in a comprehensive understanding of Delaware law on this topic:

ABRY Partners V, LP, et al. v. F&W Acquisition, LLC, et al., C.A. No. 1756-VCS, opinion (Del. Ch. Feb. 14, 2006)

Anvil Holding Corp., et al. v. Iron Acquisition Co., Inc., et al., C.A. No. 7975-VCP, memo. op. (Del. Ch. May 17, 2013)

TEK Stainless Piping Products, Inc. v. Sheila Mahony Smith, et al., C.A. No. N13C-03-175-MMJ-CCLD, memo. op. (Del. Super. Oct. 14, 2013)

Universal American Corp. v. Partners Healthcare Solutions Holdings, LP, et al., C.A. No. 13-1741-RGA, memo. op. (D. Del. July 24, 2014)

ITW Global Investments, Inc. v. American Industrial Partners Capital Fund IV, LP, et al., C.A. No. N14C-10-236-JRJ-CCLD, opinion (Del. Super. June 24, 2015)

FdG Logistics, LLC v. A&R Logistics Holdings, Inc., C.A. No. 9706-CB, opinion (Del. Ch. Feb. 23, 2016);

Universal American Corp. v. Partners Healthcare Solutions Holdings, LP, et al., C.A. No. 13-1741-RGA, memo. op. (D. Del. Mar. 31, 2016)

IAC Search, LLC v. Conversant, LLC, C.A. No. 11774-CB, memo. op. (Del. Ch. Nov. 30, 2016)

Stephen B. Trusa v. Norman Nepo, et al. and XION Management, LLC, C.A. No. 12071-VCMR, memo. op. (Del. Ch. Apr. 13, 2017)

ChyronHego Corp., et al. v. Cliff Wight, et al., C.A. No. 2017-0548-SG, memo. op. (Del. Ch. July 31, 2018)

Affy Tapple, LLC v. ShopVisible, LLC, et al., C.A. No. N18C-07-216-MMJ-CCLD, opinion (Del. Super. Mar. 7, 2019)

Joseph C. Bamford, et al. v. Penfold, LP, et al., C.A. No. 2019-0005-JTL, memo. op. (Del. Ch. Feb. 28, 2020)

Wind Point Partners VII-A, LP v. Insight Equity AP X Co., LLC, et al., C.A. No. N19C-08-260-EMD-CCLD, opinion (Del. Super. Aug. 17, 2020)

Some of the foregoing cases have been highlighted on these pages. This may not be a complete list of Delaware cases that cover the fraud v. anti-reliance clause issue, but it’s a great start.

Key Facts of Swipe case:

This case involves a dispute over the lack of disclosure by the seller prior to closing when the seller learned that a key customer was claiming to terminate its business relationship even though the sales price was impacted by the existence of key customers. The sellers knew that if the buyers learned of the termination by the key customer involved that the deal might not close. See Slip op. at 8. Nonetheless, the sellers did not inform the buyers of the termination of the key customer at issue. Moreover, the sellers did not amend any of the financial information provided to the buyers, which had then become stale. Id. at 9. Based on weaker-than-expected performance before the closing, the buyers and the sellers did agree to reduce the purchase price even though the loss of the key customer was not disclosed.

Key Principles of Law with Widespread Applicability:

  • The court cited to multiple cases to explain when an anti-reliance clause will not bar a fraud claim. See Slip op. at 28-29.
  • The court also elucidates when a fraud claim and a contract claim will not be considered duplicative; when both can proceed at the preliminary stage of a case; and when a contract claim and a fraud claim will not be considered boot-strapped. See id. at 31-33.
  • The court explained why duplicative claims may often survive at the motion to dismiss stage. See footnote 61 and accompanying text.
  • The court explained the primacy of contract law in Delaware, and when parallel contract claims and breach of fiduciary duty claims may not proceed in tandem. See footnote 58 and accompanying text.

In addition to the cases cited above on the topic at hand, this decision should be compared with the Delaware Superior Court’s Infomedia decision that was issued just a few short weeks before this Chancery ruling. Of course, the exact terms of the applicable agreements and the detailed circumstances are often determinative, but in the unrelated Delaware Superior Court decision about a month earlier, the court concluded that the failure to inform the sellers shortly before the execution of an asset purchase agreement that key customers intended to terminate their service contracts, even though written notice had not yet been received, would not be a sufficient basis for fraudulent misrepresentation claims due to anti-reliance provisions in an asset purchase agreement, thereby resulting in a grant of the motion to dismiss, based on the terms of the agreement involved in that case. See Infomedia Group Inc. v. Orange Health Solutions, Inc. (Del. Super. July 31, 2020).