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Maybe it’s because I hated doing them so much as a junior associate, but whatever the reason, I am always drawn to Chancery Court decisions addressing disclosure schedules. That’s why I thought the Chancery Court’s recent letter decision in Aldrich Capital Partners Fund, LP v. Bray, (Del. Ch.; 5/24), was worth blogging about.  It’s just a letter ruling, so the case isn’t going down in the annals of Delaware corporate law, but it’s still interesting for the way the Court analyzed the language of the agreement relating to the disclosure schedules and the language contained in the schedules themselves.

The case arose out of alleged breaches of IP ownership and non-infringement reps contained Section 4.16 of a stock purchase agreement with outside investors in Rhythm Management Group, and a no breaches of material contracts rep contained in Section 4.25 of that agreement.  The reps in question were qualified by general disclaimer language stating that they were accurate “except as qualified by the Disclosure Schedules.” Section 8.18 of the stock purchase agreement also included the following language addressing the scope of the disclosure schedules:

The disclosures in the Disclosure Schedules are to be taken as relating to the representations and warranties of the Company and the Seller set forth in the corresponding section of this Agreement and in each other section of this Agreement (to the extent the applicability of such disclosure is readily apparent on its face . . .), notwithstanding the fact that the Disclosure Schedules are arranged by sections corresponding to the sections in this Agreement or that a particular section of this Agreement makes reference to a specific section of the Disclosure Schedules.

The language used in the disclosure schedule themselves wasn’t entirely consistent with this familiar seller-friendly language, and said that “any information disclosed herein under any section number shall be deemed to be disclosed and incorporated into any other section number under the Agreement if specified under such other section number.”

The plaintiff sued the defendant for fraud and cited alleged inaccuracies in the foregoing reps relating to a license with Murj, Inc. and litigation surrounding that license in support of its claims. In moving to dismiss those claims, the defendant cited the agreement’s language concerning the scope of the disclosure schedules and argued that the relevant reps were appropriately qualified by the schedules. In refusing to dismiss the investors’ fraud claims, the Court noted the inconsistency in the disclaimer language contained in the body of the agreement and in the schedules, but said that even looking solely to the agreement language, the plaintiffs’ claims against the defendant should not be dismissed:

The Court doesn’t need to decide between those competing approaches at this stage. Even applying SPA § 8.18—which is Bray’s preferred route—it is reasonable to construe DS § 4.16(b) as not modifying all of the challenged representations. For starters, the contents of DS §§ 4.16(a) and 4.25 undercut the notion that it is “readily apparent” that DS § 4.16(b) should apply to those representation. DS § 4.16(a) is not merely blank or omitted; instead, it explicitly states, “none.”

In the Court’s view, it is reasonable to interpret “none” to mean that no disclosures apply, implicitly or otherwise. DS § 4.25 leads to a similar conclusion for a dissimilar reason. DS 4.25 discloses many material contracts, including by cross-referencing other sections of the Disclosure Schedule, but it makes no mention of Murj, the Murj Litigation, or DS § 4.16(b). Under Delaware’s contract principles, DS § 4.25’s inclusion of explicit cross-references weighs against finding implicit cross-references.

Moreover, notwithstanding DS §§ 4.16(a) and 4.25’s silence, the Disclosure Schedule explicitly mentions the Murj Litigation outside of DS § 4.16(b). Specifically, DS § 4.18 discloses pending and threatened litigation against Rhythm. Right at the top, it says, “[t]he Murj Litigation.” Either that separate disclosure is superfluous, or DS § 4.16(b)’s scope isn’t quite as broad as Bray contends. The Court declines to hold that an interpretation that defies this state’s presumption against meaningless contractual language is unambiguously correct.

The Court also observed that Disclosure Schedule § 4.16(b) mentions the Murj Litigation only where the corresponding representation says there is no pending litigation against Rhythm—i.e., representations that are directly refuted by the Murj Litigation’s mere existence. To the Court, this suggested that the “readily apparent on its face” language in Section 8.18 of the agreement applies “to each representation that directly conflicts with the disclosure” and that, under this construction, the challenged representations wouldn’t be modified by DS § 4.16(b). Ultimately, the Court concluded that the plaintiffs’ position that the challenged representations were unmodified by the disclosure schedules was not unreasonable, and denied the motion to dismiss.

– John Jenkins