It is common practice to include an integration clause in contracts, stating that the contract represents the entire agreement between the parties. That said, in disputes between parties to M&A transactions, buyers often attempt to establish liability based on pre-closing statements made by the seller as part of the due diligence process. In response, sellers attempt to add a disclaimer regarding any pre-closing statements; however, based on recent case law, that disclaimer may not be enough to eliminate post-closing liability.
We have looked at data in our Forsite™ M&A Deal Tool from over 500 deals where Fortis Advisors has served as shareholder representative, and determined that in 47% of all M&A transactions, the seller includes a representation that it is not making any other representations other than those set forth in the merger agreement. Only 25% of merger agreements include a statement from the buyer that it is relying solely on its own investigation and the express representations and warranties set forth in the merger agreement. Accordingly, in a majority of all merger agreements, neither the seller nor the buyer disclaim extra-agreement reliance, opening the door for post-closing claims based on pre-closing statements made outside of the merger agreement.
The Delaware Court of Chancery recently weighed in on this issue, making it even more difficult for sellers. In FdG Logistics LLC v. A&R Logistics Holdings, Inc., the Court held that a seller’s representation that it was not making any representations outside of the merger agreement was insufficient to prevent the buyer from bringing a fraud claim based on extra-agreement statements. Because of the strong public policy considerations on anti-fraud, only the buyer directly including a non-reliance provision will serve to fully integrate the representations and warranties in an agreement and insulate the seller against claims based on pre-closing statements.
While fraud claims at some level can always overcome the language of an agreement (e.g., if the buyer alleges fraud in the inducement, pre-closing statements are critical in determining the merits of the claim), the best practice is to negotiate for the buyer to include a non-reliance statement—a seller’s disclaimer will not be sufficient.