Significant 2021 Decisions Affecting Private Company M&A

• Published date: 21 February 2022
• Subject Matter: Corporate/Commercial Law, M&A/Private Equity, Corporate and Company Law, Directors and Officers, Contracts and Commercial Law
• Law Firm: Arnold & Porter
• Author: Mr Nicholas O'Keefe, Edward A. Deibert, Jonathan E. Green, Arthur Luk, Aaron F. Miner, William Perdue, Carmela Romeo, Eric Levine, Nate Klein, Jennifer McLellan, Matthew R. Bemis, Elliot S. Rosenwald and Stefan N. Weidemann

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):

"NOTWITHSTANDING ANY OTHER PROVISION HEREIN TO THE CONTRARY, EACH OF THE BUYER AND PARENT ACKNOWLEDGES AND AGREES, THAT FROM AND AFTER THE CLOSING, EXCEPT IN THE CASE OF FRAUD, PARENT SHALL NOT HAVE ANY DIRECT OR INDIRECT LIABILITY (DERIVATIVELY OR OTHERWISE) WITH RESPECT TO ANY BREACH OF ANY REPRESENTATION OR WARRANTY (OTHER THAN THE FUNDAMENTAL REPRESENTATIONS) MADE BY PARENT IN THIS AGREEMENT. IN FURTHERANCE OF THE FOREGOING, THE BUYER AND PARENT EACH ACKNOWLEDGES AND AGREES THAT EXCEPT IN...