IAC v. Conversant: Delaware Court of Chancery Enforces Disclaimer of Reliance to Dismiss Fraud Claim Based on Misinformation in Data Room

Practical Law Legal Update w-004-8449 (Approx. 6 pages)

IAC v. Conversant: Delaware Court of Chancery Enforces Disclaimer of Reliance to Dismiss Fraud Claim Based on Misinformation in Data Room

by Practical Law Corporate & Securities

Background

The case arises from the Stock and Asset Purchase Agreement entered into on December 8, 2013, among IAC Search, LLC, ValueClick, Inc., and two ValueClick foreign subsidiaries. The agreement provided for the purchase by IAC of six ValueClick subsidiaries, including Investopedia, LLC, the owner and operator of the financial-information website investopedia.com. For a summary of the purchase agreement, see What's Market IAC Interactive, Inc./ValueClick, Inc. Purchase Agreement Summary. The deal was valued at signing at $80 million and closed on January 8, 2014.

IAC filed suit on December 7, 2015, amended on February 29, 2016. The complaint contained seven claims, six for breach of contract and one for fraud. The breach-of-contract claims, which the court did not dismiss, are not the subject of this Legal Update.

In its fraud claim, IAC alleged that ValueClick misrepresented the revenue that it earned off certain display ads on Investopedia's website. According to IAC, ValueClick made these misrepresentations during the due diligence process in documents placed in the electronic data room and in statements ValueClick made in response to IAC's diligence requests. However, these statements were not captured in any representation or warranty in the purchase agreement and IAC did not challenge any of the financial disclosures concerning Investopedia set forth in express contractual representations. Rather, IAC asserted that it was fraudulently induced into entering into the agreement to acquire Investopedia on the basis of ValueClick's statements during the due diligence review. Consequently, and unlike IAC's breach-of-contract claims, the fraud claim would not be subject to the purchase agreement's $8 million indemnity cap, which pertained to breaches of contractual representations and warranties and excluded damages for fraud. (For a discussion of whether to exclude fraud claims from a purchase agreement's indemnification remedy, see Practice Note, Indemnification Clauses in Private M&A Agreements: Exclusive Remedy.)

ValueClick argued that the agreement barred IAC's fraud claim by virtue of IAC's disclaimer of reliance on any statements made by ValueClick and not documented in the purchase agreement. Three provisions of the agreement were relevant to this argument. First, Section 3.31 of the agreement contained the following disclaimer by the seller ValueClick:

"Neither the Seller nor any of its Affiliates or Representatives is making any representation or warranty of any kind or nature whatsoever, oral or written, express or implied (including but not limited to, any relating to financial condition, results of operations, assets or liabilities of the Transferred Group), except as expressly set forth in this Article III, as modified by the Disclosure Schedules, and the Seller hereby disclaims any such other representations and warranties."

Second, Section 4.7 of the agreement contained the following acknowledgment by the buyer IAC:

"The Buyer is a sophisticated purchaser and has made its own independent investigation, review and analysis regarding the Transferred Group and the transactions contemplated hereby, which investigation, review and analysis were conducted by the Buyer together with expert advisors, including legal counsel, that it has engaged for such purpose. The Buyer acknowledges that neither the Seller nor any of its Affiliates or Representatives is making, directly or indirectly, any representation or warranty with respect to any data rooms, management presentations, due diligence discussions, estimates, projections or forecasts involving the Transferred Group, including, without limitation, as contained in the Confidential Information Packet dated August 2013 and any other projections provided to Buyer, unless any such information is expressly included in a representation or warranty contained in Article III…" (emphasis added)

Finally, Section 10.6 of the agreement contained the following integration clause:

"This Agreement (including the Exhibits and Schedules hereto), the Ancillary Agreements and the Confidentiality Agreement constitute the entire understanding and agreement, and supersede all prior written agreements, arrangements, communications and understandings and all prior and contemporaneous oral agreements, arrangements, communications and understandings between the parties with respect to the subject matter hereof and thereof."

At issue was whether these provisions (taken together or individually) amounted to a valid disclaimer by IAC under Delaware law.

Outcome

The Chancery Court ruled in ValueClick's favor on IAC's fraud claim, dismissing it on grounds that the purchase agreement contained a valid disclaimer of reliance by IAC on any extra-contractual statements made by ValueClick.

The court reviewed some of its recent guidance on disclaimers of reliance, including its decisions in Abry Partners, Prairie Capital, and FdG Logistics, all of which are discussed in Disclaimers of Reliance in Private M&A Deals Chart. Principally, the court made the following observations in determining that the IAC/ValueClick purchase agreement contained an effective disclaimer of reliance:

Clear language of non-reliance. "Murky integration clauses" that do not contain explicit anti-reliance representations do not relieve a seller of any extra-contractual fraudulent representations it has made. To bar fraud claims based on extra-contractual representations, the clause must contain a clear contractual promise by the buyer that it did not rely on statements "outside the contract's four corners" in deciding to sign the contract. (Abry P'rs V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032, 1059 (Del. Ch. 2006).)
No "magic words" required. Although a disclaimer of reliance is frequently worded in the negative (the buyer does not rely on the seller's extra-contractual statements), a disclaimer worded in the affirmative (the buyer relies only on its own investigation) is equally effective as long as the import is clear that the buyer has not relied on any representations not contained in the contract (Prairie Capital III, L.P. v. Double E Hldg. Corp., 132 A.3d 35, 51 (Del. Ch. 2015)). This can be worded in the form of an "independent investigation" provision, as long as the provision makes clear that the buyer has relied on its investigation for purposes of deciding whether to enter into the contract.
Buyer disclaims. The buyer must make the disclaimer of reliance. It is inadequate for the seller to state in the contract that it makes no further representations or warranties. The buyer itself must represent that it has not relied on any representations or warranties not documented in the agreement. (FdG Logistics LLC v. A&R Hldgs., Inc., 131 A.3d 842, 860 (Del. Ch. 2016).)

Based on these principles, the court held that while Section 3.31 of the agreement—a disclaimer by the seller ValueClick—could not form the basis for a disclaimer of reliance by IAC, Section 4.7 did, even though it was worded in affirmative language.

The court acknowledged that the disclaimer was not worded as strongly as the provision in question in Abry. In that agreement, the buyer added that the seller would not be subject to any liability resulting from the buyer's reliance on any information provided during the due diligence period. The IAC agreement, by contrast, did not contain similar language of release. The court allowed that the absence of this language made the IAC disclaimer a "closer call" than Abry, but concluded that the combined effect of Section 4.7 and the integration clause of Section 10.6 was clear anti-reliance by IAC.

Practical Implications

The decision in IAC v. Conversant addresses a quintessential M&A dispute, in which a buyer receives information about the target business during due diligence, does not receive a representation to back up that information, and later wishes to file suit when it discovers it was misinformed.

The Delaware judiciary now has a significant amount of precedent case law addressing disclaimers of reliance that, if present in the final purchase agreement, amount to a waiver by the buyer of any fraud claims it could have pursued. The principal conditions for an effective disclaimer under Delaware law are that:

The provision must contain clear language of non-reliance, as opposed to generic language of integration or of independent investigation by the buyer.
The provision does not have to be worded in terms of the buyer not relying on statements not contained in the agreement. A statement that the buyer has relied on its own investigation and on the seller's statements in the agreement is equally effective.
The buyer, as the aggrieved party, must make the disclaimer. A statement by the seller that it makes no additional representations outside those contained in the agreement does not disclaim the buyer's reliance on the seller's extra-contractual statements.

Disclaimers of reliance are critical for sellers to negotiate in their agreements. Without a disclaimer, the seller can be liable for any misinformation it provided during the due diligence review. Moreover, because a claim based on fraud does not sound in contract, it is not subject to the negotiated cap on indemnification (which ordinarily applies only to contract claims). At the same time, a buyer should not strategize to leave out representations that it believes it needs for the sake of keeping open the option of bringing a fraud claim. To establish fraud, a plaintiff must establish both reliance and intent on the part of the defendant, as opposed to contract claims that only require showing a breach of the representation.

IAC v. Conversant: Delaware Court of Chancery Enforces Disclaimer of Reliance to Dismiss Fraud Claim Based on Misinformation in Data Room | Practical Law