Chancery Court Finds Non-Reliance Language Insufficient to Bar Extra-Contractual Fraud Claims
By Lisa Stark and Mark Hammes
In FdG Logistics v. A&R Logistics, C.A. No. 9706-CB (Del. Ch. Feb. 23, 2016), the Court of Chancery held that a non-reliance provision contained in a merger agreement was ineffective to bar a buyer’s fraud claims based on extra-contractual statements made during the due diligence and negotiation process because the non-reliance provision was formulated solely as a limitation on the seller’s representations and warranties. According to the Court, for a non-reliance provision to be effective against a buyer, it must be formulated as an affirmative promise by the buyer that it did not rely on any extra-contractual statements made by the seller during the sales process. The decision clarifies the Court of Chancery’s 2015 decision in Prairie Capital III, L.P. v. Double E Holding Corp., C.A. No. 10127-VCL (Del. Ch. Nov. 24, 2015) in which the Court emphasized that “no magic words” are required for a non-reliance provision to be effective.
This case arises out of a private equity firm’s 2012 purchase of a trucking company, A&R Logistics, Inc. (“Old A&R”), through a merger transaction. FdG Logistics LLC (“FdG”), as the representative of the selling securityholders, initiated an action against the buyer, A&R Logistics Holdings, Inc. (“A&R”) to recover a pre-closing tax refund. FdG had acquired approximately 60% of Old A&R in 2007 and worked closely with its management from 2007 to 2012, when it was sold to A&R. That transaction was effected through a merger wherein Old A&R was merged into A&R as the surviving entity, with FdG and approximately 18 selling securityholders as the sellers. In the Agreement and Plan of Merger among the parties (the “Merger Agreement”), Old A&R made a series of representations and warranties which were qualified by reference to a set of disclosure schedules. The Merger Agreement also provided that each of the securityholders would indemnify A&R for breaches of representations and warranties, subject to a deductible of $1 million and a cap of $20.3 million, neither of which applied in the case of “fraud or intentional breach.” The Merger Agreement also contained provisions requiring A&R to pay to FdG all refunds of taxes relating to pre-closing periods. The Merger Agreement was signed and the transaction closed simultaneously on December 18, 2012.
Within six months of the close of the transaction, A&R began sending a series of claims for indemnification, alleging that Old A&R had violated employment laws, fraudulently charged customers, manipulated tickets and time stamps, violated environmental laws, falsely reported expenses, and hidden structural impairments at its facilities. Meanwhile, on its 2012 tax return, A&R received a refund of approximately $2 million which it refused to remit to FdG. FdG brought an action for breach of contract for failure to remit this refund, and A&R asserted counterclaims for indemnification, violation of the Delaware Securities Act, common law fraud, and unilateral mistake. This opinion resolved FdG’s motion for summary judgment on a number of claims, including A&R’s claim for common law fraud.
With respect to the common law fraud claim, FdG argued that the claims should be dismissed under a non-reliance clause in the Merger Agreement because the claims were based on documents or statements made outside the four corners of the Merger Agreement. Specifically, the non-reliance clause at issue provided, in pertinent part:
“NOTWITHSTANDING ANYTHING TO THE CONTRARY, (A) THE COMPANY SHALL NOT BE DEEMED TO MAKE TO BUYER ANY REPRESENTATION OR WARRANTY OTHER THAN AS EXPRESSLY MADE BY THE COMPANY IN THIS AGREEMENT AND (B) THE COMPANY MAKES NO REPRESENTATION OR WARRANTY TO BUYER WITH RESPECT TO (I) ANY PROJECTIONS, ESTIMATES OR BUDGETS HERETOFORE DELIVERED TO OR MADE AVAILABLE TO BUYER OR ITS COUNSEL, ACCOUNTANTS OR ADVISORS OF FUTURE REVENUES, EXPENSES OR EXPENDITURES OR FUTURE FINANCIAL RESULTS OF OPERATIONS OF THE COMPANY UNLESS ALSO EXPRESSLY INCLUDED IN THE REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS ARTICLE 5, OR (II) EXCEPT AS EXPRESSLY COVERED BY A REPRESENTATION AND WARRANTY CONTAINED IN THIS ARTICLE 5, ANY OTHER INFORMATION OR DOCUMENTS (FINANCIAL OR OTHERWISE) MADE AVAILABLE TO BUYER OR ITS COUNSEL, ACCOUNTANTS OR ADVISORS WITH RESPECT TO THE COMPANY.”
The Court denied FdG’s motion to dismiss the fraud claims, explaining that although Delaware law does enforce clauses which identify the specific information upon which a party has relied and foreclose reliance on other information, the agreement must contain a clear statement by the party seeking to rely on extra-contractual statement disclaiming such reliance. In the Merger Agreement, although there was a clear statement that Old A&R was not making any representation or warranty outside of the Merger Agreement, there was no clear statement by A&R that it had only relied on the information contained within the four corners of the Merger Agreement. Accordingly, A&R’s fraud claim survived the seller’s motion for summary judgment.
FdG Logistics v. A&R Logistics Holdings, C.A. No. 9706-BC (Del. Ch. February 23, 2016)