A recent decision by Judge Meghan A. Adams, sitting by designation as a Vice Chancellor of the Court of Chancery of the state of Delaware, in Adviser Investments v. Powell, C.A. 2022-1149-MAA (Del. Ch. Sept. 29, 2023), serves as one of the more recent and pointed decisions from the court on a plaintiff’s ability, in certain cases, to rely on extra-contractual statements in support of a post-acquisition fraud claim despite the existence of a contractual integration clause. The decision saved threatened claims from a motion to dismiss and is a timely reminder of the limits on integration clauses during a time when corporate and commercial litigators are seeing an uptick in matters arising from acquisitions completed during the busy deal days of 2021.
In 2021, Adviser Investments, LLC (Adviser) began negotiations to acquire Polaris Wealth Advisory Group, LLC (Polaris) with a deal valued at nearly $100 million closing in 2022. During these negotiations, Adviser worked with Polaris’ founder, defendant Jeffrey Powell. Powell also founded a purportedly separate investment firm and fund, both of which the parties discussed as part of the Polaris acquisition negotiations.
The parties executed the securities purchase agreement (SPA) in spring 2022. Thereafter, Adviser informed the court that it discovered Polaris was worth far less than the $100 million deal price. According to Adviser, Powell had engaged in acts of concealment and misrepresentation (Adviser Investments, C.A. 2022-1149-MAA, at 4-7 (bullet pointing alleged wrongdoing) in violation of certain “protective terms” within the SPA including, for example: “a guarantee by Powell that he ‘complied with all legal requirements;’ that ‘no Polaris employees were infringing on the company’s intellectual property or violating their employment agreements;’ and that Powell would maintain the business between the SPA’s execution and closing and provide accurate financial information through closing.” Adviser Investments, C.A. 2022-1149-MAA, at 4. As such, Adviser, relying on those alleged extra-contractual concealments and misrepresentations, filed claims for fraud, breach of contract, unjust enrichment, and tortious interference with contract.
Powell moved to dismiss the claims pursuant to Rules 9(b) and 12(b)(6), arguing the fraud claim failed to meet the required pleading standard and, otherwise, that the SPA also contain disclosure-related and integration provisions that prevented Adviser’s claims. Those provisions, Section 1.1 (purchase and sale), Section 2.22 (exclusivity of representations and warranties), and Section 11.7 (entire agreement), are as follows:
1.1 Purchase and Sale. In reliance upon the representations and warranties contained herein, and subject to the terms and conditions hereof, at the closing the sellers agree to sell, assign, transfer, and deliver to the buyer, and the buyer agrees to purchase, acquire, and accept from the sellers, the purchased securities. …
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11.7 Entire Agreement. This agreement, the attached exhibits and schedules, the side letter, and the other transaction documents contain the entire understanding of the parties, and there are no further or other agreements or understandings, written or oral, in effect among the parties relating to the subject matter hereof unless expressly referred to herein.
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2.22 Exclusivity of Representations and Warranties. Neither the company nor any of its affiliates or representatives is making any representation or warranty on behalf of the company 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 company or with respect to any other information provided to the buyer at any time and by any means), except as expressly set forth in this Article 2, in any transaction document or in any certificate delivered at closing, and the company hereby disclaims any such other representations or warranties whether made by the company or any of its affiliates, managers, officers, employees, agents or representatives however made, directly or indirectly. Neither the company nor any other person shall have or subject to any liability to the buyer or any other person resulting from the distribution to the buyer or any person acting on its behalf, or the buyer’s or such other person’s use of, any such information, including any information, documents, projections, forecasts or other material made available to the buyer or such other person or their respective representatives in certain “data rooms” or management presentations or otherwise in expectation of the transactions contemplated by this agreement or the transaction documents. Notwithstanding anything to the contrary, nothing shall limit or impair any person’s remedies or rights, or be deemed to be a waiver of, any claims related to actual fraud.
In support of its decision denying the motion to dismiss (with the exception of dismissing the tortious interference claim), the court explained that the SPA provisions cited by Powell did not “clearly and unambiguously disclaim reliance by Adviser on extra-contractual representations.” Adviser Investments, C.A. 2022-1149-MAA, at 14. Instead, the court read Section 2.22 to be a disclaimer by Polaris of what it was and was not representing and noted nothing in the section “purported to state the universe of information relied upon by Adviser …” Of particular note in this case was the express carveout in Section 2.22 that protected claims of fraud but, even without that clause, the outcome would have been the same based on the plain language of the SPA.
It will behoove litigators preparing to bring or defend against fraud-based claims in the acquisition context to note that the recent decision is in line with a series of Delaware precedent on fraud claims and integration clauses, including Partners & Simons v. Sandbox Acquisitions, 2021 WL 3159883, at *4 (Del. Ch. July 26, 2021); FdG Logistics v. A&R Logistics Holdings, 131 A.3d 842 (Del. Ch. 2016); Prairie Capital III v. Double E. Holding, 132 A.3d 35 (Del. Ch. 2015); and Abry Partners V v. F & W Acquisition, 891 A.2d 1032 (Del. Ch. 2006).
Indeed, Delaware law is steadfast in holding that “a party cannot promise, in a clear integration clause of a negotiated agreement, that it will not rely on promises and representations outside of the agreement and then shirk its own bargain in favor of a ‘but we did rely on those other representations’ fraudulent inducement claim.”
Reprinted with permission from Delaware Business Court Insider, © ALM Media Properties LLC. All rights reserved.
