DealLawyers.com Blog

One of the things I’ve learned from the past five years of blogging is that the Delaware Chancery Court is just as likely to issue a 200-page opinion that’s hard to write a one paragraph blog about as it is to issue a 20-page opinion that could almost justify a treatise.  Vice Chancellor Slights’ recent decision in Spay v. Stack Media, (Del. Ch.; 12/21), definitely falls into the latter category. Although his opinion is just 31 pages long, the Vice Chancellor not only covers some jurisdictional issues of interest to litigators, but also addresses several contract interpretation and contractual fraud issues that are worth noting by anyone involved in drafting an acquisition agreement.

For instance, one of the issues raised in the case was the survival of obligations imposed by covenants & closing conditions.  The defendants argued that claims alleging breaches of those deal terms were untimely, because they were asserted beyond the survival period specified in the acquisition agreement. The Court disagreed, noting that the survival clause by its terms applied only to the reps & warranties:

Even a cursory review of the APA reveals that Defendants have erroneously conflated representations and warranties with covenants. The survival provision, by its terms, only applies to “representations and warranties,” but Sections 5.9, 5.12, 5.13 and 6.1 are covenants and a condition to close, not representations and warranties. This distinction is not immaterial or hyper-technical. The purpose of representations and warranties is to guarantee the truthfulness of a present fact, whereas covenants are promises to perform.

It makes perfect sense that parties to a transaction would limit the time that alleged breaches of factual representations could be brought without limiting the time a party could bring breaches of an agreement to do or refrain from an act presently or in the future, and many do so. To the extent parties seek to limit contractually when a suit for breach of covenants can be brought, they can accomplish that goal by placing language to that effect in their contract. These parties elected not to do that, and there is no basis in law for this Court to pick up the pen and add that language now.

I don’t know about you, but I’ve seen more than a few acquisition agreements over the years that only address reps & warranties in the survival clause. As Vice Chancellor Slights observed, there may be good reasons for that – but this case provides a reminder that there’s more to think about when drafting that clause than just deciding the right expiration date to drop into it.

Other issues addressed include whether claims that the survival period applied to fraud claims based on knowingly fraudulent reps (the Vice Chancellor said no), and whether the sellers could be liable for covenants that were made by the target only (the Vice Chancellor said yes, citing the language of the agreement’s indemnification clause).  Like I said, there are all sorts of drafting lessons to be drawn from this brief decision, and I highly recommend that you read the whole thing.

We’re taking tomorrow off for the Christmas holiday and blogging next week will likely be sporadic. Most of you are either taking some time off or – more likely – desperately trying to close year-end deals & in either case, you’ll have better things to do than to read my drivel.  Merry Christmas to those who celebrate the holiday, and thanks to everyone for reading this blog!

– John Jenkins