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Contractual reliance disclaimers can be helpful in precluding fraud claims based on non-contractual statements, but as the Delaware Chancery Court’s decision in Agspring Holdco v. NGP X US Holdings, (Del. Ch. 7/20), illustrates, the language of the contractual reps & warranties themselves can give rise to fraud claims.  Here’s the intro from this Fried Frank memo:

At the pleading stage of litigation, the court found it reasonably conceivable that: (i) the portfolio company officers deliberately concealed from the buyer a steep decline in Agspring’s earnings before and after the signing and closing in December 2015; (ii) as a result of the earnings decline, certain of Agspring’s representations and warranties in the sale agreement and a related financing agreement were false when made; and (iii) not only the portfolio company officers, but also the PE-seller, knew or were in a position to know that the representations were false.

In denying the defendants motion to dismiss, the Chancery Court found that the defendants alleged conduct implicated the portfolio company’s representations concerning material contracts & the absence of a MAE.  The memo notes that Chancellor Bouchard’s decision is also a reminder that a PE-seller can be liable for fraudulent representations made by its portfolio company in an agreement even if it is not a party to the agreement.

This is a case that seems to have very bad facts – the target’s earnings didn’t just decline, they fell off a cliff (less than $1 million v. $33 million projected).  What’s more, the decline allegedly was deliberately concealed by the target’s officers and the buyer was provided repeatedly with reassurances about the target’s performance. Still, the Court appears to have taken a pretty liberal approach to the allegations that the conduct in question made the reps false when they were made.

For example, the Chancellor found allegations that the downward earnings spiral was sufficient to make a representation that “to the knowledge of Agspring, no event has occurred or circumstance exists…[that may] result in a breach of or default under any Material Contract” potentially fraudulent. But the default in question occured nearly three years after the closing, when Agspring started missing payments on a debt obligation that was a material contract under the terms of the agreement.

The memo lays out a number of practice points arising out of the decision, including suggesting that sellers consider seeking some novel protections – such as contractually limiting “the parties against which fraud claims could be made, the timeframes for making them, the subject matters to which they could relate, and/or the responsibility for payment of the fees and expenses incurred in defending them unless the buyer prevails in the litigation.”

– John Jenkins