Acquisition agreements in private M&A transactions frequently contain language that purports to limit the purchaser’s recourse against the seller for extra-contractual misrepresentations, even if fraudulent, in order to allocate among the parties the risk of potential post-closing losses. Such limitations on liability are generally enforceable under Delaware law when they have been specifically negotiated between sophisticated parties, and are commonly implemented through a combination of a so-called “entire agreement” integration clause and an “exclusive representation” provision. Delaware case law had previously suggested that such provisions might need to contain specific language to serve as an effective disclaimer, but the Delaware Court of Chancery recently ruled, in the context of a motion to dismiss, in Prairie Capital III, LP v. Double E Holding Corp. (Del. Ch. Nov. 25, 2015), that no “magic words” are required so long as the parties’ intention is unambiguous.
Prairie Capital arose out of the sale of a portfolio company by one private equity firm to another. The purchasers asserted following closing that the sellers had, among other things, committed fraud grounded in alleged misrepresentations not contained in the acquisition agreement and in the failure to disclose the facts underlying such misrepresentations to the purchasers.
One of the requirements of a prima facie claim for fraudulent misrepresentation is reasonable reliance on the misrepresentation in question, and the Court’s decision turned on whether the purchasers could reasonably have relied on any extra-contractual misrepresentation in light of the language in the acquisition agreement. In addition to an integration clause, the acquisition agreement contained an “exclusive representation” provision which stated affirmatively that the purchasers had relied on their own independent investigation and on the representations expressly set forth in the agreement. It also disclaimed all extra-contractual representations, but did not expressly state that the purchasers had not relied on any extra-contractual representations.
The purchasers argued that, notwithstanding the language in the acquisition agreement, their fraud claim should survive the motion to dismiss due to the absence in the acquisition agreement of an explicit disclaimer of “reliance” on extra-contractual representations. The purchasers’ position appeared to be somewhat consistent with the recent trajectory of Delaware case law, which had begun to suggest that specific phrasing was required for such a disclaimer to be effective. For example, on the basis of contractual language reading simply “[t]here are no restrictions, promises, representations, warranties, covenants, or undertakings, other than those expressly set forth or referred to herein or therein,” the Delaware Court of Chancery found the plaintiff’s reliance on extra-contractual representations to have been unreasonable in a 2003 decision. But in a 2013 decision, the Chancery Court found a very similar provision to have left open the door for a claim for fraud based on extra-contractual representations, in the context of a contract that also included an express reservation of rights with respect to fraud claims, due to the absence of an explicit statement of non-reliance: “except for the representations and warranties in Articles III, IV, and V, neither the Company nor any Seller makes any other express or implied representation or warranty with respect to the Company … or any Seller or the transactions contemplated by this Agreement.” Based on this decision and similar recent cases, practitioners representing sellers had increasingly insisted that acquisition agreements include express disclaimers of reliance on extra-contractual representations. But Vice Chancellor Laster was not persuaded by the purchasers’ assertions in Prairie Capital, dismissing their claim and holding that no “magic words” were required for such disclaimers so long as they “add up to a clear anti-reliance clause.”
The Court in Prairie Capital also rejected the purchasers’ argument that a fraud exception contained in the acquisition agreement’s “exclusive remedy” provision could form a basis for the purchasers’ extra-contractual fraudulent misrepresentation claim, concluding that the fraud exception did not address which representations the purchasers could rely on and, accordingly, did not override the “exclusive representation” provision’s limitations on the universe of information on which a fraud claim could be based.
The purchasers also argued that their claims of fraudulent omission should survive the motion to dismiss due to the absence in the acquisition agreement of any disclaimer of reliance on omissions of material information by the sellers. To support their position, the purchasers pointed to TransDigm Inc. v. Alcoa Global Fasteners, Inc. (Del. Ch. 2013), in which the Chancery Court found the language in the acquisition agreement sufficient to disclaim reliance as to extra-contractual representations, but nevertheless insufficient to disclaim reliance as to extra-contractual omissions involving the alleged intentional and affirmative concealment of material facts, since the language did not expressly disclaim reliance on the “accuracy and completeness” of extra-contractual information provided by the seller. Again, Vice Chancellor Laster was not persuaded, noting that “any misrepresentation can be re-framed for pleading purposes as an omission.” (Indeed, the fraudulent omissions alleged by the purchasers in Prairie Capital were identical to the fraudulent extra-contractual misrepresentations they had asserted.) To accept the purchasers’ argument, the Court concluded, would render the “exclusive representation” clause ineffective. The Court therefore disagreed with the purchasers’ interpretation of TransDigm as requiring explicit language disclaiming reliance on omissions, and reiterated its view that no “magic words” are required for such disclaimers.
Although the Court’s decision in Prairie Capital provides some flexibility to those drafting disclaimers in acquisition agreements, the inconsistency in recent Delaware lower court decisions, absent further clarification from the Delaware Supreme Court, cautions practitioners to continue to draft these provisions as unambiguously as possible. In particular, we continue to recommend that these disclaimers be formulated as an acknowledgment by the purchaser expressly disclaiming the existence of, and any reliance by the purchaser on, any representations other than those expressly set forth in the agreement (including in particular any representations as to the accuracy or completeness of the information made available to the purchaser).
 See, e.g., RAA Management, LLC v. Savage Sports Holdings, Inc. (Del. 2012).
 H-M Wexford LLC v. Encorp, Inc. (Del. Ch. 2003).
 Anvil Holding Corporation v. Iron Acquisition Company, Inc. (Del. Ch. 2013).