A recent Delaware Chancery Court ruling, ABRY Partners v. F&W, reflects the tension between promoting freedom of contract, and protecting parties from fraud. The court reiterated the principle that a contract cannot insulate a seller who either deliberately lies or knows that the entity being sold has lied. The court also found, however, that between sophisticated parties, a contract can be crafted to insulate a seller from a rescission claim based upon false statements made unintentionally.
The ABRY case involved the sale of a publishing company, F&W, by one private equity fund to another. The buyer alleged that the seller and F&W failed to disclose a material adverse effect, and that, working in concert, they intentionally overstated F&W’s revenues, inducing ABRY to pay a price for F&W that was inflated by approximately $100 million.
The stock purchase agreement provided that the exclusive remedy for breach was monetary damages, which were capped at $20 million, barred any rescission claim by the buyer, and provided that the exclusive remedy provision was bargained for and reflected in the purchase price. The agreement did not contain the common exception for fraud. The stock purchase agreement also contained the buyer’s agreement to rely on only those representations contained in the document.
The buyer sought rescission of the contract on the grounds of fraudulent inducement. The seller moved to dismiss the rescission claim, arguing that the parties had crafted the exclusive remedy provision to limit the buyer’s remedies solely to monetary relief. The buyer claimed that to dismiss the rescission claim would "sanction unethical business practices of an abhorrent kind and . . . create an unwise incentive system for contracting parties that would undermine the overall reliability of promises made in contracts."
The court held that the buyer could obtain rescission only if it proved that: (i) the seller knew F&W’s representations and warrantees were false; and (ii) the seller either itself communicated the false information to the buyer or knew that F&W had done so. The court also held that the buyer could not claim rescission based upon the seller’s misrepresentation concerning a matter that the buyer had expressly agreed to exclude from the representations and warranties.
The court emphasized that this was a heavily negotiated agreement between sophisticated parties, and that the indemnification provision was reflected in the price paid for F&W. While the court recognized the right of a buyer to rescind in egregious cases of intentional misrepresentation, it also upheld the ability of sophisticated parties to draft contracts that allocate the risk of misrepresentation.
The seller in the ABRY case carefully crafted a purchase agreement that successfully limited its liability for unintentional false statements. Taking a cue from this case, a well-drafted seller’s agreement should include the following:
- a clause that describes the information the buyer has relied upon and specifically states that the buyer has not relied upon information provided in confidential information memoranda, data rooms, management presentations, or other discussions;
- a disclaimer as to any representations or warranties other than those expressly set forth in the purchase agreement;
- an indemnification provision and an exclusive remedy provision that limits the buyer’s recourse for breaches of representations and warranties to the indemnification provision;
- an integration clause providing that the purchase agreement is the final expression of the parties’ agreement and supersedes all prior agreements and discussions between the parties.
A copy of the court’s opinion is available by clicking here.
For further information, please contact a member of our Corporate Practice Group.