The Court of Chancery denied the Sellers’ motion to dismiss the Buyer’s claim of fraud based on statements made outside the terms of a merger agreement. The Court also granted the Sellers’ motion to dismiss Buyer’s claim that the Sellers violated the Delaware Securities Act.
1. Fraud Claims Based on Statements Made Outside the Terms of a Contract Can Only Be Foreclosed by an Affirmative Disclaimer of Reliance by the Party Alleging Fraud
Although fraud claims based on a contract can be foreclosed by an affirmative disclaimer of reliance by the party alleging fraud, the merger agreement contained no such disclaimer.
The Court cited the following example of an effective disclaimer:
[THE] REPRESENTATIONS AND WARRANTIES [FOUND WITHIN THIS AGREEMENT] CONSTITUTE THE SOLE AND EXCLUSIVE REPRESENTATIONS AND WARRANTIES . . . TO THE BUYER IN CONNECTION WITH THE TRANSACTION, AND THE BUYER UNDERSTANDS, ACKNOWLEDGES, AND AGREES THAT ALL . . . REPRESENTATIONS AND WARRANTIES OF ANY KIND OR NATURE EXPRESS OR IMPLIED (INCLUDING, BUT NOT LIMITED TO, ANY RELATING TO THE FUTURE OR HISTORICAL FINANCIAL CONDITION, RESULTS OF OPERATIONS, ASSETS OR LIABILITIES OR PROSPECTS [OF SELLER]) [NOT EXPRESSLY SET FORTH HEREIN] ARE SPECIFICALLY DISCLAIMED BY THE [SELLER] PARTIES.
If, in contrast to the above, a disclaimer fails to include (i) what the party claiming fraud is relying upon when it decides to enter into the agreement or (ii) that the party claiming fraud was not relying on any representations made outside of the agreement, it is insufficient to foreclose fraud claims based on statements or omissions made outside the terms of the contract. In this case, the following provision was held to be insufficient because it did not contain the language highlighted above:
EXCEPT AS EXPRESSLY SET FORTH IN THIS ARTICLE 5, THE [SELLER] MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AT LAW OR IN EQUITY AND ANY SUCH OTHER REPRESENTATIONS OR WARRANTIES ARE HEREBY EXPRESSLY DISCLAIMED INCLUDING ANY IMPLIED REPRESENTATION OR WARRANTY AS TO CONDITION, MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE. NOTWITHSTANDING ANYTHING TO THE CONTRARY, (A) THE [SELLER] SHALL NOT BE DEEMED TO MAKE TO BUYER ANY REPRESENTATION OR WARRANTY OTHER THAN AS EXPRESSLY MADE BY THE [SELLER] IN THIS AGREEMENT. . . .
Bottom Line: In order to foreclose claims of fraud based on statements or omissions made outside the terms of a contract, the contract must contain an affirmative disclaimer that either: (1) specifically includes what the party claiming fraud is relying upon when it decides to enter into the agreement or (2) that the party claiming fraud was not relying on any representations made outside of the agreement.
2. 6 Del. C. § 2708 Cannot Be Used to Trump Inherent Jurisdictional Limitations Found in Delaware Statutes
The Court in FdG Logistics LLC also addressed whether the Delaware Securities Act applied automatically to the merger agreement because the merger agreement included an election under 6 Del. C. § 2708. Section 2708 permits parties to agree in writing that a contract will be governed by Delaware law without regard to principles of conflict of law, as long as the contract at issue involves $100,000 or more. In contrast, the Delaware Securities Act applies only where there is a sufficient nexus between Delaware and the transaction at issue.
The plaintiffs argued that the nexus requirement of the Delaware Securities Act did not apply due to the Section 2708 Delaware choice-of-law provision in the merger agreement. The Court disagreed and found that Section 2708 cannot be used to automatically satisfy jurisdictional requirements found in Delaware statutes.