Buyers and Sellers Beware: Effectively Limiting Post-Closing Litigation Exposure with Anti-Reliance Clauses in Purchase Agreements

The Delaware Court of Chancery—the nation’s leading forum for corporate and M&A disputes—recently provided a roadmap for how to limit post-closing litigation exposure by eliminating certain fraud claims. In ChyronHego Corp. v. Wight, the court explained how parties to a corporate acquisition agreement can, in clear and unequivocal language, disclaim reliance on extra-contractual representations to preclude a buyer from claiming that the seller fraudulently misrepresented the condition and value of the target company. Following the court’s guidance can help limit post-closing litigation exposure to the parties’ agreed-upon exclusive remedies.

The case involved a dispute stemming from broadcast graphics company ChyronHego’s acquisition of another graphics company, Click Effects. ChyronHego alleged that the sellers of Click Effects misrepresented the actual condition and value of Click Effects during due diligence, through misleading documents and projections placed in the data room. The sellers moved to dismiss ChyronHego’s common-law fraud claim based on the anti-reliance language of the purchase agreement, by which ChyronHego disclaimed reliance on any representations but those recited in the parties’ contract. Because reliance is a key element of a fraud claim, contractual anti-reliance language—if drafted correctly—could bar a plaintiff from asserting common-law fraud claims premised on representations made during negotiations or due diligence but not expressly incorporated into the agreement.

The Court of Chancery dismissed the buyer’s fraud claim based on misleading due diligence materials, and provided the following guidance on how to draft effective anti-reliance clauses in M&A agreements:

• Murky integration clauses, or standard integration clauses—stating that the contract encompasses the parties’ entire agreement and supersedes all prior oral or written representations—without explicit anti-reliance representations, will not relieve a party of its oral and extra-contractual fraudulent representations.
• The contract as a whole must contain language that, when read together, adds up to a clear, unequivocal anti-reliance clause by which the buyer contractually promised that it did not rely on statements outside the contract’s four corners in deciding to sign the contract.
• An effective “holistic” anti-reliance clause should include a combination of: (1) a standard integration clause, (2) an exclusive remedies provision, (3) a definition of excluded liabilities in an indemnification provision, and, importantly (4) an explicit anti-reliance (or “exclusive representation”) provision stating that the seller shall not be deemed to have made any representation, warranty, covenant or agreement, express or implied, about the target company or its business (including any financial projections or budgets), other than those explicitly set forth in the purchase agreement. (For the complete anti-reliance clause, see pages 12-13 of the court’s opinion.) 
• Read together, these provisions clearly would indicate that the parties have not relied on extra-contractual representations, but may seek recovery under the contract’s indemnification provisions or for fraudulent representations made in the contract itself.

The case is an example of how careful drafting can effectively limit litigation exposure. If you have questions about the above or any matters related to your business, please feel free to contact authors Scott Pueschel at 603.373.2019 or spueschel@pierceatwood.com, or Mark Rosen at 603.373.2015 or mrosen@pierceatwood.com.