DealLawyers.com Blog

Earlier this year, the Chancery Court held that a standard contractual integration clause was insufficient to bar claims premised on a buyer’s alleged assurances to assist in growing the target’s business post-closing. Last week, in Cytotheryx, Inc. v. Castle Creek Biosciences, (Del. Ch.; 10/24), the Chancery Court reached the same conclusion in the context of a buyer CEO’s oral assurances that it had removed any obstacles to obtaining lender approval required to permit the seller to exercise a contractual redemption right.

The case arose out of Cytotheryx’s sale of its majority stake in a biotech startup to Castle Creek in exchange for cash and preferred shares in the buyer.  The terms of those preferred shares included in Castle Creek’s charter provided for a redemption right, but that right was subject to the condition that its exercise did not violate Castle Creek’s charter or “other then existing governance documents or debt financing documents.”  During the course of the merger negotiations, Castle Creek’s CEO allegedly represented that any obstacles to obtaining lender approval for Cythotheryx to exercise its redemption right had been removed.

When Cytotheryx subsequently tried to exercise that right, Castle Creek pointed to language in its credit agreement prohibiting such a transaction and advised Cytotheryx that its lenders had refused to consent to the redemption.  Cytotheryx sued, alleging fraud and promissory estoppel.  Castle Creek pointed to the language of the charter and the merger agreement’s integration clause, which provided that the merger agreement “contains the entire understanding of the parties hereto with respect to the subject matter contained herein and supersedes all prior agreements and understandings, oral and written, with respect hereto.”

As in this year’s prior case on integration clauses, the defendants pointed to the Chancery Court’s 2014 decision in Black Horse Capital v. Xstelos Holdings, which enforced an integration clause to bar reliance on extra-contractual representations. Superior Court Judge Vivian Medinilla, sitting in Chancery by designation, distinguished this case from Black Horse Capital and held that the integration clause – when read together with the agreement’s fraud reservation – wasn’t enough to defeat the seller’s fraud claim:

Unlike Black Horse, where the alleged misrepresentations directly contradicted the terms of the agreement, here, the alleged misrepresentations about lender approval for redemption are not expressly contradicted by the Agreement. The Charter’s provision on which Defendants rely does not necessarily contradict representations that lender approval had been obtained or would not be an issue. Further distinguishing Black Horse, the alleged misrepresentations here occurred before and after closing of the Merger Agreement to include statements made by Castle Creek’s CEO over a year after closing that Castle Creek would honor its obligation to redeem the shares.

Moreover, the Merger Agreement preserves Cytotheryx’s right to bring an action for fraud, “relating to the representations, warranties, and covenants contained in this Agreement.” Defendants do not dispute this. The fraud reservation is “explicit and unambiguous.” Delaware law does “not protect a defendant from liability for a plaintiff’s reliance on fraudulent statements made outside of an agreement absent a clear statement by that counterparty—that is, the one who is seeking to rely on extra-contractual statements—disclaiming such reliance.”

Judge Medinilla observed that Cytotheryx not only didn’t give a clear statement of non-reliance, but that the merger agreement clearly and explicitly reserved its right to bring fraud actions arising from the Merger Agreement and related documents.  As a result, she concluded that the integration clause did not bar Cytotheryx from bringing fraud claims, and rejected the defendants’ efforts to dismiss its promissory estoppel claims on similar grounds.

– John Jenkins