The Delaware Business Court Insider‘s current edition includes an article I co-authored with Chauna Abner that highlights a recent Delaware Court of Chancery decision that explains the types of claims that are barred by a standard integration clause–as compared to the more robust anti-reliance clause that is required to preclude most typical claims arising from allegations about misrepresentations made regarding a contract. See Shareholder Representative Services v. Albertsons Cos., C.A. No. 2020-0710-JRS (Del. Ch. June 7, 2021). The article is available at this link.
Courtesy of The Delaware Business Court Insider, a copy of the article also appears below.
“Chancery Identifies Claims Barred by Standard Integration Clause”
By: Francis G.X. Pileggi* and
Chauna A. Abner**
The Court of Chancery’s recent decision in S’Holder Representative Servs. LLC v. Albertsons Cos., C.A. No. 2020-0710-JRS (Del. Ch. June 7, 2021), involves the seller of a business claiming that the buyer intentionally evaded post-merger earnout payments. This opinion is useful for its explanation of the types of claims that will, and will not, be barred by a standard integration clause.
The basic facts involved the sale of a company called Plated, bought by Albertsons, the supermarket chain. The closing price was $175 million with an earnout of up to $125 million if certain milestones were reached. Although the merger agreement gave Albertsons sole and complete discretion over the operation of Plated post-closing, the agreement specifically prohibited Albertsons from taking any action with the intent of decreasing or avoiding the earnout. Nonetheless, it was alleged that Albertsons changed Plated’s business model post-closing with an intent to avoid the earnout.
The Court’s decision was rendered in the context of a motion to dismiss, but detailed facts were recited indicating that the top management of Albertsons never intended to promote Plated. If properly supported, Plated would have fulfilled its projected revenues and, thus, would have triggered the earnout.
The Court began its analysis noting the “typical” facts the case presented surrounding the payout of post-closing earnout consideration. Specifically, the Court explained that: “[A]s is typical, . . . Albertsons bargained for the right to operate Plated post-closing in its discretion limited only by its express commitment not to operate Plated in a manner intended to avoid the obligation to pay the earnout.” Id. at *1.
The Court recited the well-settled standard for deciding a motion to dismiss followed by the elements to establish a breach of contract claim and a fraudulent inducement claim. Id. at *16. In deciding whether Albertsons breached the merger agreement by intentionally decreasing or avoiding the earnout, the court turned to the meaning of “intent” and explained that: “‘Intent’ is a ‘well-understood concept,’ defined as ‘a design, resolve or determination with which persons act.’” Id. at *17. The Court further explained that “[a] defendant’s intent can be inferred from well-pled allegations in a complaint, with the understanding that allegations of intent need only be averred generally.” Id.
Specifically, in the context of this case, the Court explained that: “To plead a buyer’s intent to avoid an earnout, the goal of avoiding the earnout need not be ‘the buyer’s sole intent’; rather, a plaintiff may well-plead that the buyer’s actions were ‘motivated at least in part by that intention.’” Id. at *17.
The most noteworthy aspects of this opinion are found in the Court’s distinction between the claims that will be barred by a standard integration clause–as compared with the claims that will only be barred if a standard integration clause is supplemented and buttressed by more explicit anti-reliance language demonstrating with clarity that the plaintiff has agreed that it was not relying on facts outside the contract.
The Court instructed that:
• Fraud claims will not be barred by a simple integration clause that does not contain a more robust and explicit anti-reliance provision that expresses with clarity that there will be no reliance on facts outside the contract. In this case, the integration clause alone would not bar allegations of extra-contractual statements of fact. But that is not what the plaintiff alleged.
• Because the plaintiff alleged fraudulent inducement and claimed that Albertsons lied about its “future intent” with respect to the operation of the post-business closing, the Court explained clear anti-reliance language was needed to stand as a contractual bar to an extra-contractual fraud claim based on factual representations.
• By contrast, an integration clause alone is sufficient to bar a fraud claim based on expressions of future intent or future promises. The Court cited among other cases in support of its reasoning, Black Horse Capital, LP v. Capital Xstelos Holdings, Inc., 2014 Del. Ch. LEXIS 188, at * 22 (Del. Ch. Sept. 30, 2014), to explain that an extra-contractual fraud claim based on a “future promise” cannot stand when the parties committed in a clear integration clause that they will not rely on promises and representations outside the agreement.
• The Court, however, concluded that plaintiff bargained for Albertsons not to intentionally scuttle the earnout and, therefore: “It may attempt to prove a breach of that contractual obligation [regarding intent] but cannot claim fraud based on future promises not memorialized in the merger agreement.”
*Francis G.X. Pileggi is the managing partner of the Delaware office of Lewis Brisbois Bisgaard & Smith LLP, and the primary author of the Delaware Corporate and Commercial Litigation Blog at www.delawarelitigation.com.
**Chauna A. Abner is a corporate and commercial litigation associate in the Delaware office of Lewis Brisbois Bisgaard & Smith LLP.