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14 June 2017
On November 30 2016 Vice Chancellor Bouchard of the Delaware Court of Chancery issued an opinion that provides additional guidance on how the inclusion of certain key provisions in a purchase agreement can protect a seller against an extra-contractual fraud claim asserted by a buyer in connection with an acquisition transaction.(1) To minimise a seller's exposure to a potential extra-contractual fraud claim, a purchase agreement should contain the following provisions:
In the suit, plaintiff IAC Search asserted that ValueClick fraudulently induced IAC Search to overpay for one of ValueClick's subsidiaries by providing false information concerning such subsidiary's ad sales in documents placed in an electronic data room and in statements that ValueClick made in response to information requests in a "diligence tracker". Importantly, while the ultimate purchase agreement contained representations concerning certain financial results and performance metrics of the subsidiary in question, the parties chose not to incorporate the allegedly fraudulent information into an express contractual representation.
Bouchard's decision to grant ValueClick's motion to dismiss IAC Search's fraud claim hinged on three key provisions of the purchase agreement:
In conclusion, Bouchard found that the integration clause and the buyer acknowledgment clause added up to a "clear anti-reliance clause to bar fraud claims based on extra-contractual statements made during due diligence". Notably, the purchase agreement included no release of the seller from liability for misstatements made during the due diligence process, and the opinion noted that the absence of such a release made this a "closer call" than if such a release had been included.
Although the Delaware Court of Chancery has noted in the past that there are "no magic words", this case provides helpful drafting guidance on how to minimise the risk of extra-contractual fraud claims in the context of a sale transaction.
For further information on this topic please contact John Sorkin or Larissa R Smith at Ropes & Gray LLP office by telephone (+1 212 596 9000) or email (email@example.com or firstname.lastname@example.org). The Ropes & Gray LLP website can be accessed at www.ropesgray.com.
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