Delaware Law Alert: When Should M&A Buyers Make Anti-Reliance Clauses a Two-Way Street?
When a buyer structures an M&A deal in which the seller has a continuing interest in the performance of the business being sold (whether through an earnout, rollover, issuance of buyer equity as some or all of the consideration, or otherwise), the buyer and its counsel should be aware of the risk that the seller may bring a fraud claim based on statements the buyer and its representatives made during negotiations about the buyer’s business and its prospects. Three recent Delaware court opinions offer a reminder that buyers who desire to limit their fraud exposure to only their express representations stated in the purchase agreement should be sure to require that the seller agree to an anti-reliance clause in the agreement.
Background on Anti-Reliance Clauses
Anti-reliance clauses have become a common feature of Delaware-governed M&A deals. In an anti-reliance clause (also referred to as a non-reliance clause), a party represents that, in entering into the transaction, it relied only on the express representations that its counter-party made in the purchase agreement and not on any outside statements or representations (including those made during due diligence and negotiations). Because a fraud claim requires proof of reasonable reliance, a Delaware court will dismiss a fraud claim at the pleading stage if the claim is based on extra-contractual statements and the agreement has an anti-reliance provision relating to those statements.
It is quite common for sellers to ask buyers to agree to an anti-reliance clause in the purchase agreement, and buyers typically are willing to do so. It is substantially less common for buyers to ask sellers to agree to an anti-reliance clause. This makes sense in a cash deal since the seller receives the full consideration at closing, making the risk of a post-closing fraud claim by the seller against the buyer unlikely. However, when the seller has a continuing interest in the business through an earnout or some sort of equity participation, the likelihood of the seller bringing a post-closing fraud claim against the buyer is significantly higher. In these instances, as the Delaware opinions below illustrate, buyers should be attentive to the importance of having the seller agree to an anti-reliance clause to mitigate the risk of a post-closing fraud claim by the seller. Of course, sellers may push back on including an anti-reliance clause, and buyers may agree to stand behind the statements they make over the course of deal negotiations, but they should do so only as a deliberate and well-considered choice. Furthermore, since it is likely that the seller will ask the buyer to agree to an anti-reliance clause in the transaction, the buyer could use the seller’s request as leverage to demand that the buyer receive the same protection against extra-contractual fraud claims that the seller would receive.
Recent Delaware Opinions
Earnout Assurances: In both Trifecta Multimedia Holdings Inc. v. WCG Clinical Services LLC1 (ruling on a motion to dismiss) and Fortis Advisors LLC v. Johnson & Johnson2 (a post-trial opinion), the relevant purchase agreements included earnouts. When the earnout payments did not materialize, the sellers claimed (among other causes of action) that the buyer made fraudulent statements by offering assurances during negotiations about the high likelihood of certain earnout milestones being achieved.
- Although both courts determined that other statements made by the buyers and their representatives during negotiations were not actionable because they constituted puffery or were truthful statements of future intent (even though that intent later changed), they concluded that the buyers’ assurances about the earnout milestones were sufficiently specific to induce reasonable reliance by the sellers.
- Neither of the buyers in these cases made express representations in their respective purchase agreements relating to the certainty of achieving the earnout milestones. However, because neither buyer was covered by an anti-reliance clause in their agreement, the court concluded that the buyers had agreed to accept responsibility for their statements made outside of the four corners of the agreement. In Trifecta, the court denied the buyer’s motion to dismiss and allowed the sellers’ fraud claims to proceed, and in Fortis Advisors, the court awarded damages to the sellers.
Business Projections: Pearce v. NeueHealth, Inc.3 (Del. Super. Ct. July 15, 2024) also involved an agreement that did not include an anti-reliance clause covering the buyer. The merger agreement provided for a mix of cash and buyer stock as consideration, and over the course of negotiations, the buyer shared certain projections relating to the buyer’s business but did not include any representations in the agreement about those projections. After closing, the sellers learned that the buyer’s business was deteriorating due to operational deficiencies. The sellers alleged that the projections were fabricated, and in the absence of an anti-reliance clause, the court refused to dismiss the sellers’ fraud claims, holding that the sellers had pleaded sufficient facts to infer reasonable reliance on the projections.
1 C.A. No. 2023-0699-JTL, 318 A.3d 450 (Del. Ch. June 10, 2024, Laster, V.C.).
2 C.A. No. 2020-0881-LWW (Del. Ch. September 4, 2024, Will, V.C.)
3 C.A. No. N23C-09-005 SKR CCLD (Del. Super. Ct. July 15, 2024, Rennie, J.).
