United States: Significant 2021 Decisions Affecting Private Company M&A

Express Scripts, Inc. v. Bracket Holdings Corp., 248 A.3d 824 (Del. Feb. 23, 2021)

Summary

Delaware Supreme Court held that Abry's prohibition on sellers from excluding seller liability for fraud under the acquisition agreement only applies to intentional fraud; under Delaware law, fraud based on recklessness can be excluded.

Background

Express Scripts involved an appeal from an $82.1 million jury award to an affiliate of a private equity fund (buyer) against sellers of businesses acquired by buyer for fraudulently inflating revenue and working capital of one of the acquired businesses. The fraud claim was based on financial statement representations and warranties under the securities purchase agreement (the SPA). The issue on appeal was whether the jury in the Delaware Superior Court action was properly instructed to consider both deliberate fraud and recklessness. In reversing the Superior Court's judgment and remanding for a new trial, the Supreme Court held that the relevant provisions of the SPA permitted recovery only for intentional fraud, and that limiting recovery for fraud under the SPA in this manner was permissible under Delaware law.

ABRY Partners

The court noted the tension articulated in ABRY Partners V, L.P., v. F&W Acquisition LLC, ¹ between the "strong tradition in American law that holds that contracts may not insulate a party from damages or rescission resulting from the party's fraudulent conduct", and the "strong American tradition of freedom of contract."² The Express Scripts court noted that the Abry court resolved the tension by holding that a contracting party cannot limit its own liability for fraud that it consciously participated in, but can limit its own liability for fraud where it merely acted "in a reckless, grossly negligent, or negligent manner".

The SPA

The court held that the indemnification framework under the SPA was consistent with the approach endorsed in Abry. Section 9.6(D) of the SPA provided (text bolded by the court):

The court held that this unambiguously provided that except in the case of deliberate fraud, the buyer's exclusive remedy for breach of the general representations and warranties was the representation and warranty insurance policy (the R&W Policy). The court held that this interpretation was supported by language in the buyer's representations and warranties relating to the R&W Policy, which contained exceptions from a representation that the R&W Policy would not create liability for sellers, and from the obligation to include a waiver on subrogation rights, in connection with deliberate fraudulent acts, statements or omissions

The court rejected the buyer's arguments that various references in Article 9 and elsewhere in the SPA to fraud, without referencing deliberate fraud, evidenced a coherent drafting approach that permitted buyer to recover for common law fraud, including fraud based on recklessness. The court noted that Section 9.6(D) expressly superseded other provisions of the SPA, and that while the first sentence of Section 9.6(D) referenced fraud generally, the second sentence, which referenced deliberate fraud, followed on from, and refined, the first sentence. The court also rejected the buyer's grammatical arguments that the word "deliberate" in Section 9.6(D) qualified the words "act", "statement" and "omission", and not the word fraudulent", and that "deliberate" fraud can include recklessness.

Takeaway

The decision provides useful confirmation of the scope of Abry, which is the seminal decision on the permissibility of limiting liability for fraud in M&A transactions. Express Scripts confirms that the approach taken in many deals of limiting the fraud exclusion from the exclusive remedies under the acquisition agreement to just intentional fraud is permissible under Delaware law. Express Scripts also serves as a reminder to parties of the importance of having a clear definition of fraud in acquisition agreements and ensuring that it is consistently used.

Manichaean Cap., LLC v. Exela Techs., Inc., 251 A.3d 694 (Del. Ch. May 25, 2021)

Summary

In case of first impression, Delaware Chancery Court adopted theory of "reverse veil piercing" to permit plaintiffs to pierce the corporate veil to enforce an award against the judgement debtor's subsidiaries.

Background

Plaintiffs were former stockholders of SourceHOV Holding, Inc. (the Company), a company that was acquired by defendant Exela Technologies, Inc. in a merger in which shares of common stock of the company were converted into the right to receive a membership interest of an affiliate of Exela. The merger and related follow-on merger resulted in the Company becoming an indirect subsidiary of Exela.³ Plaintiffs exercised dissenters rights and commenced an appraisal action in the Delaware Court of Chancery. The court appraised the fair value of the common stock at $4,591 per share, resulting in plaintiffs' shares being worth $57,684,471. The decision was affirmed on appeal by the Company.

Footnotes

1 891 A.2d 1032 (Del. Ch. Feb. 14, 2006).

2 Express Scripts, 248 A.3d at 830 (citing ABRY, 891 A.2d at 1059).

3 The court's decision refers to the Company becoming an indirect subsidiary of Exela, but an org chart in the decision indicates that the Company may have converted into an LLC in connection with the mergers. Whether the Company ended up becoming a corporation or an LLC following the mergers does not appear to be critical to the decision.

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