Delaware's Chancery Court rejected a buyer's fraud claims premised on misrepresentations and omissions other than the statements the contract identified as the seller's "sole and exclusive representations" in a recent decision arising from a corporate acquisition.

In response to a complaint in which the seller sought the release of a portion of transaction proceeds held in escrow, the buyer asserted claims for fraud and aiding and abetting fraud, as well as for indemnification under the governing stock purchase agreement (SPA). The buyer claimed, in part, that shortly before the SPA's execution the seller made oral and written misrepresentations regarding the company's financial condition.

The Court held the SPA foreclosed fraud claims based on extra-contractual statements. The SPA contained an "exclusive representation clause" specifying that, "[i]n making its determination to proceed with the Transaction, the Buyer has relied on (a) the results of its own independent investigation and (b) the representations and warranties of the [seller] expressly and specifically set forth in this Agreement" and such "representations and warranties by the [seller] constitute the sole and exclusive representations and warranties of the [seller] to the Buyer in connection with the transaction."

The same provision further stated that "all other representations and warranties of any kind or nature express or implied (including, but not limited to, any relating to the future or historical financial condition, results of operations, assets or liabilities or prospects of [the sold company]) are specifically disclaimed by the [seller]." The SPA also included an integration clause asserting the agreement was the "entire understanding of the Parties."

Noting that Delaware law enforces "anti-reliance clauses," provisions "that identify specific information on which a party has relied and which foreclose reliance on other information," the Court rejected the argument that the provision there was ineffective because the buyer did not explicitly disclaim reliance on extra-contractual representations. The Court said that "Delaware law does not require magic words" to demonstrate an anti-reliance clause. Where "a party represents that it only relied on particular information, then that statement establishes the universe of information on which that party relied."

The Court also rejected the buyer's argument that "even if the Exclusive Representations Clause bars a fraud claim based on extra-contractual representations, the clause has 'no application whatsoever to [seller's] fraudulent omission and concealment claims.'" According to the Court, "[b]ecause a party in an arms' length contractual setting begins the process without any affirmative duty to speak, any claim of fraud in an arms' length setting necessarily depends on some form of representation," and therefore, "[a] fraud claim in that setting cannot start from an omission."

The Court also found that the fraudulent omissions argument was foreclosed by the Exclusive Representations Clause, reasoning "any misrepresentation can be re-framed for pleading purposes as an omission. If a plaintiff could escape a provision like the Exclusive Representations Clause by re-framing an extra-contractual misrepresentation as an omission, then the clause would be rendered nugatory." Where "parties identify a universe of contractually operative representations in a written agreement," the Court held, "they remain in that universe."  If there is "[a] party that is later disappointed with the written agreement, they cannot escape through a wormhole into an alternative universe of extra-contractual omissions."

Thus, all fraud claims based on representations outside of the SPA were found to have been barred by the SPA and were dismissed. The Court did, however, find that fraud claims premised on representations in the SPA could proceed.

The Court also addressed questions regarding the sufficiency of the buyer's contractually mandated notice of indemnification claims. The SPA required written notice of such claims "with reasonable supporting details." The seller's notice alleged breaches of the SPA but, in some cases, failed to identify the particular contract sections claimed to have been violated. The seller argued that the failure to identify specific sections rendered the notice insufficient.

Rejecting the defense, the Court found "[t]he SPA does not require that the Buyer specify the precise section that was breached; it only requires reasonable notice of the claim." The Court commented that "[t]he parties could have bargained for an obligation to specify a particular section, but they did not do so here." Because it "describ[ed] in detail the events" underlying the claim, the notice "gave the Sellers' Representative reasonable notice of the claim." The Court agreed with the seller, however, that the buyer could not maintain an indemnification claim for an earlier time period not identified in the notice. The Court held that to "permit the Buyer to treat a notice relating to claims about [the specified time period] as a placeholder for later asserted claims regarding earlier time periods would contravene the notice requirement."

Ballard Spahr's established Chancery Court practice handles challenges to mergers, acquisitions, and financing transactions, as well as takeover battles, proxy contests, matters relating to change of control, and other issues under Delaware's corporate and business entity statutes. For more information, please contact David J. Margules at 302.252.4431 or or Jessica Case Watt at 302.252.4449 or

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