Shearman & Sterling LLP | M&A and Corporate Governance Litigation Blog | Delaware Chancery Court Dismisses Fraud Claim As Barred By Purchase Agreement Anti-Reliance Provisions<br >  
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  • Delaware Chancery Court Dismisses Fraud Claim As Barred By Purchase Agreement Anti-Reliance Provisions
     

    12/05/2016
    On November 30, 2016, Chancellor Andre G. Bouchard of the Delaware Court of Chancery granted, in part, ValueClick Inc.’s motion to dismiss in a fraud and contract dispute over alleged misrepresentations relating to the sale of certain of its subsidiaries to IAC Search, LLC.  IAC Search, LLC v. Conversant LLC (f/k/a ValueClick, Inc.), C.A. No. 11774-CB, 2016 WL 6995363 (Del. Ch. Nov. 30, 2016).  ValueClick, now known as Conversant LLC, sold six subsidiaries — including Investopedia, LLC — to IAC for $90 million in January 2014 pursuant to a Stock and Asset Purchase Agreement (the “Purchase Agreement”).  In its complaint, IAC alleged that ValueClick fraudulently induced IAC to overpay for Investopedia by supplying false information to IAC during the due diligence process.  IAC also asserted several claims for breaches of representations and warranties included in the Purchase Agreement.  Although the Court upheld some of the breach of contract claims, Chancellor Bouchard found that “certain provisions of the [Purchase Agreement] add up to a clear disclaimer of reliance on extra-contractual statements that bar[] IAC’s claim for fraud.”

    As to the fraud claim, IAC alleged that ValueClick falsified performance metrics regarding Investopedia’s ad revenue.  Specifically, as alleged, ValueClick made these misrepresentations during the due diligence process in documents made available by ValueClick in the electronic data room and in responses to due diligence requests in a system known as “Diligence Tracker.”  But as the Court noted, “IAC’s fraud claim is premised . . . on the accuracy of information concerning Investopedia provided to IAC during due diligence that the parties chose not to incorporate into an express representation or warranty in the [Purchase Agreement].” 

    Chancellor Bouchard analyzed various provisions in the Purchase Agreement to determine whether the Purchase Agreement sufficiently disclaimed extra-contractual representations so as to “shield” ValueClick, as the seller, from fraud claims asserted by IAC, as the buyer.  Specifically, Chancellor Bouchard highlighted (i) a provision in which ValueClick disclaimed making any extra-contractual representations; (ii) a provision in which IAC acknowledged that ValueClick was not making any representations concerning due diligence information unless included in an express representation and warranty; and (iii) a “standard integration clause,” providing that the Purchase Agreement (and related ancillary written agreements) constitute the entirety of the parties’ agreement regarding the transaction.

    Quoting FdG Logistics LLC v. A&R Holdings, Inc., 131 A.3d 842, 860 (Del. Ch. 2016), Chancellor Bouchard concluded that “in order to bar fraud claims, a disclaimer of reliance ‘must come from the point of view of the aggrieved party,’ meaning that it must come from the buyer who is asserting the fraud claim.”  Here, according to Chancellor Bouchard, the “critical language” was the provision in which IAC acknowledged that ValueClick was not making any representations concerning due diligence information unless included in an express representation and warranty. 

    Significantly, Chancellor Bouchard recognized that the absence of a provision expressly disclaiming liability related to information provided in the due diligence process made this a “closer call” than a prior case, Abry Partners V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032, 1059 (Del. Ch. 2006).  But Chancellor Bouchard ultimately determined that “the combined effect of [this buyer’s acknowledgement provision] and the integration clause . . . add up . . . to a clear anti-reliance clause to bar fraud claims based on extra-contractual statements made during due diligence.”   

    Notably, the dismissal of the fraud claim appeared to take on heightened importance in this case, notwithstanding the survival of several breach of contract claims, as Chancellor Bouchard expressly noted that “[u]nlike IAC’s other claims, this claim is not subject to the $8 million indemnity cap in the [Purchase Agreement], which excludes damages for fraud.”  The decision is likely to serve as helpful guidance in the drafting of purchase agreements, as it further clarifies how parties can limit potential liability with respect to information provided during the due diligence process. 
    CATEGORY: Deal Disputes

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