The great Glenn West let me know about the Delaware Court of Chancery’s recent opinion in Prairie Capital III, LP v. Double E Holding Corp. (PDF here.)
This dispute involved purchase of a business; the buyer alleged fraud on the part of officers of the target company. In his opinion, Vice Chancellor Laster dismissed the buyer’s fraud claims to the extent they relied on extra-contractual statements. He did so based on the buyer’s disclaimer of reliance in the acquisition agreement.
Two aspects of the holding stand out. First, the buyer argued that the buyer’s disclaimer of reliance wasn’t effective, in that instead of being phrased negatively (buyer is not relying on any representations not included in this agreement) it was phrased positively (buyer is only relying on the representations included in this agreement). The court rejected that argument:
If a party represents that it only relied on particular information, then that statement establishes the universe of information on which that party relied. Delaware law does not require magic words.
In particular, the court held that Delaware precedent didn’t require use of the words disclaim reliance.
And second, the buyer argued that even it couldn’t bring claims based on extra-contractual misstatements, it could still bring a claim based on the sellers’ omissions. The court rejected this argument too, on the grounds that “any misrepresentation can be re-framed for pleading purposes as an omission.” In doing so, it perhaps departed from the Court of Chancery’s earlier TransDigm opinion.
This opinion is relevant from anyone working in M&A. But more generally, it’s a reminder that the Delaware Court of Chancery tends to be reassuringly rational in interpreting contract language.
For background on this, see Glenn’s article on fraud carve-outs, accessible through this post. Glenn cautions that you can’t count on courts in other states to have the same view as the court in Prairie Capital III, LP.