The Delaware Supreme Court ruled that a bidder that declined to proceed with a $170 million could not recover recoup $1.2 million in due diligence and negotiation costs.
In RAA Management, LLC v. Savage Sports Holdings, Inc., 2012 Del. LEXIS 271 (Del. 5/18/12) , investment fund RAA Management (RAA) was invited by an investor bank to participate in an auction for Savage Sports Holdings, Inc (Savage), a privately-held sports equipment manufacturer. As a precondition to obtaining the confidential offering memorandum and access to the data room, RAA entered into a nondisclosure agreement (“NDA”) with Savage. The NDA provided that RAA would keep confidential all information furnished by Savage “concerning the Company that is non-public, confidential or proprietary in nature.” In addition, RAA agreed that Savage was making no representations or warranties as to the accuracy or completeness of any information (the “Evaluation Material”) being provided to RAA, and that Savage would have no liability to RAA resulting from RAA’s reliance on such information, except for breaches of representations and warranties that Savage was to later make in an executed “Sale Agreement. RAA also waived any claims it might have in connection with any potential transaction with Savage unless the parties entered into a definitive sale agreement.
After performing its preliminary due diligence, RAA submitted a Letter of Intent (“LOI”) to Savage that set forth the terms on which RAA might be willing to purchase all outstanding shares of Savage for a cash payment of $170 million. Savage then agreed to enter into 45-day exclusivity period to negotiate a definitive agreement with RAA.
RAA then engaged in further due diligence during January and February 2011. However, in March 2011, RAA notified Savage that it was no longer interested in acquiring the firm and demanded payment from Savage for its “sunken due diligence costs” of $1.2 million. Savage rejected RAA’s demand and RAA commenced a lawsuit to recoup its costs.
RAA asserted that Savage committed fraud by misrepresenting and concealing from RAA the existence of three alleged material unrecorded liabilities and claims. Specifically, RAA alleged that at the outset of their preliminary discussions, Savage had told RAA that there were “no significant unrecorded liabilities or claims against Savage.” However, RAA’s complaint said that during its due diligence into Savage, RAA learned of the existence of three such matters that caused RAA to abandon negotiations for the transaction.
The first alleged material non-disclosed liability (and the reason we are discussing this case) was that Savage had failed to disclose that the New York State Department of Environmental Conservation (NYSDEC) had commenced an investigation of a predecessor company of Savage to determine if it was a potentially responsible party (PRP) at the Canal-Frankfort State Superfund site. According to RAA, Savage specifically misrepresented the existence of this investigation in a document Savage provided in the on-line data room. RAA said this document declared that Savage “has no potential Superfund liabilities.” The Complaint contends that had RAA known about this investigation from the inception of its expressed interest in Savage, RAA would not have proceeded with the LOI or pursued the additional due diligence.”
The Delaware Superior Court for New Castle County dismissed the complaint, holding that two separate provisions in the NDA unambiguously barred liability for fraudulent misrepresentations. First, the Superior Court ruled that RAA expressly disclaimed reliance on the accuracy or completeness of any information provided during the course of due diligence. Second, the court said that RAA also expressly waived bringing any claim relating to a transaction between the parties, except for claims based on a representations or warranties contained in binding, final sale agreement. The Superior Court concluded that the NDA disclaimers and waiver were unambiguous and absolved the seller from intentional fraud. Finally, the court also ruled that the “peculiar-knowledge” exception to fraud disclaimers recognized under New York law did not apply.
On appeal, RAA argued that the trial court erred when it held that the NDA insulated Savage from fraud claims for withholding information about the company’s liabilities. RAA asserted that the most reasonable interpretation of the language in the NDA was that non-reliance disclaimer only barred claims based on mistakes or unintentional oversights, or negligent failures to disclose but not willful falsehoods. Alternatively, RAA contended that the disclaimer language was ambiguous if the NDA created an exception for fraud. RAA also argued that public policy should preclude parties like Savage from using contracts to shield themselves from liability for their own fraud.
The Delaware Supreme Court rejected RAA’s arguments. The court noted it was routine for parties contemplating entering into a proposed transaction to engage in extensive negotiations and diligence before executing an agreement of sale or merger. The court said the purpose of a confidentiality agreement was to promote and to facilitate such pre-contractual negotiations. The breadth and scope of the non-reliance clauses in a confidentiality agreement, the court explained, are defined by the parties.
The court observed that state Chancery Court had previously interpreted NDA clauses in two prior cases that were nearly identical to the NDA in dispute in this case. In both those cases, the court had concluded the NDA provisions held broad enough to preclude claims for fraud. The court said that when Savage and RAA entered into the NDA, both parties knew how the non-reliance clauses had been construed byDelawarecourts and could have drafted the NDA differently if they intended a different result.
The Supreme Court also held that that the peculiar-knowledge exception was meant to address circumstances where a party would face high costs in determining the truth or falsity of an oral representation and that courts were reluctant to use when sophisticated parties could have but failed to insist that the written contract terms reflect any oral undertaking on a deal-breaking issue.
Moreover, the court agreed with Savage that applying the peculiar-knowledge exception to a walk-away bidder claiming it had been provided inaccurate or incomplete due diligence information would mean that sophisticated parties could never have an enforceable agreement that a bidder would not bring due diligence claims if it walked away from negotiations.
Rejecting the public policy argument, the court quoted from another decision that held that to fail to enforce non-reliance clauses was not to promote a public policy against lying. Rather, it was to excuse a lie made by one contracting party in writing–the lie that it was relying only on contractual representations and that no other representations had been made–to enable it to prove that another party lied orally or in a writing outside the contract’s four corners.
The court also found persuasive that disclaimers were not only intended to avoid liability if the negotiations fail but also to avoid lawsuits, or at least lawsuits that cannot be quickly dismissed. Quoting from a New York case, the court agreed that the plaintiff’s position would essentially negate such disclaimers by allowing naked allegations of prior oral assurances to trump the most explicit disclaimer in a negotiation agreement at the pleading and summary judgment stage. Under such circumstances, the disclaiming party would always be forced to settle or go to trial, and perhaps lose on, every fraudulent-inducement claim supported by the bare allegation that it orally misrepresented its intent regarding a term of a loan. The absence of any means to avoid such costly litigation, the court reasoned, might well deter some lenders and other capital market participants from entering into negotiation agreements and cause fewer loans or deals to be negotiated. Thus, the court concluded that overriding policy consideration in the present circumstances, the court concluded, was the enforcement of the parties’ pre-negotiation agreement to bar litigation if negotiations failed.
The court said that New York and Delaware law required that the reasonable commercial expectations of the parties, as set forth in the non-reliance disclaimer and waiver clauses of the NDA, must be enforced. Accordingly, the Supreme Court ruled that the trial properly granted Savage’s motion to dismiss.