Parties drafting contracts governing M&A transactions should heed the recent guidance of Delaware courts to ensure their intent will be enforced.  The presence of a merger or integration clause in an M&A contract may not preclude fraudulent inducement claims based on oral misrepresentations made before the parties entered into the contract.

For example, in the context of the sale of an air ambulance business, the Delaware Superior Court recently denied defendant’s motion to dismiss, finding that plaintiff successfully alleged a claim for fraudulent inducement against Jeremy Freer, the defendant company’s founder, president, and CEO, in his individual capacity. The court found that the CEO “made numerous oral and written representations to Plaintiff about [the company]…[and] was directly involved…in the negotiation and sale of [the company] to Plaintiff.” Aviation West Charters LLC v. Jeremy Freer, C.A. No. N14C-09-271 WCC CCLD at *16-17 (Del. Super. Ct. July 2, 2015). Despite Freer’s argument that the integration clause of the asset purchase agreement (APA) barred plaintiff’s reliance on any oral representation he made before entering into the APA, the court held that “the integration clause here…does not contain an explicit disclaimer of reliance.” Id. at *22.

By contrast, however, the Delaware Court of Chancery more recently dismissed a plaintiff’s claim for fraud regarding representations made outside the four corners of a stock purchase agreement (SPA) surrounding the sale of a private equity firm. Prairie Capital III LP v. Double E Holding Corp., C.A. No. 10127-VCL (Del. Ch. Nov. 24, 2015). Plaintiff claimed reliance on the allegedly false representations defendants made during the sale process and due diligence, including fraudulently misrepresenting that the company “had met or exceeded its internal sales targets.”Id. at *14. The Court of Chancery held that the express exclusive representations and warranties (R&Ws) language of the SPA “forecloses claims of fraud based on extra-contractual misrepresentations.” Id. at *15. The SPA’s exclusive R&Ws provision stated that “such R&Ws by the…parties constitute the sole and exclusive R&Ws…the buyer understands, acknowledges, and agrees that all other R&Ws of any kind or nature…are specifically disclaimed…”  Id. This exclusive R&Ws provision was followed by a standard integration clause in the SPA. Plaintiff argued that because the integration clause did not affirmatively disclaim reliance, as in Aviation West Charters, its fraud claim could proceed. The court disagreed, holding that the exclusive R&Ws provision “represents affirmatively that the Buyer only relied on the R&Ws in the SPA.” Id. at 16-17.

Ultimately, this recent jurisprudence in Delaware underscores that the words chosen by contracting M&A parties matter.  While sophisticated deal participants will be held to their agreements, they still may have viable claims for fraud and deceit under Delaware law.

Read the court’s full Aviation opinion here and the court’s full Prairie opinion here.

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