“I meant what I said, and I said what I meant.” Delaware high court holds that stock purchase agreement indemnification fraud carveout was limited to deliberate fraud, not recklessness.
M&A Stories
August 02, 2021
Introduction:
In a recent M&A (Mergers and Acquisitions) case, the Delaware Supreme Court overturned an $82 million fraud award against a seller. The court ruled that the fraud carveout in the stock purchase agreement only applied to deliberate fraud and not recklessness.
The Deal:
The case involved the sale of a pharmaceutical research and development business. The buyer based the deal’s price on the target’s earnings in the twelve months before closing.
The Issue:
During due diligence, the buyer became concerned about a high balance of unbilled accounts in the target’s financial report. However, the target’s VP Finance explained that these were common in the industry and not a problem.
The Lawsuit:
After the deal closed, the buyer alleged that the seller had misrepresented the target’s finances, leading to inflated historical revenue and inaccurate unbilled receivable balances. The buyer sued the seller for fraud, and the jury awarded them $82.1 million in damages.
The Appeal:
The seller appealed to the Delaware Supreme Court, arguing that the trial judge had made a mistake by allowing damages for recklessness when the agreement only permitted a lawsuit for deliberate fraud. The court agreed with the seller and sent the case back for a new trial, with clear instructions to consider damages only for deliberate fraud.
This case is referred to as Express Scripts, Inc. v. Bracket Holdings, No. 62, 2020, Supreme Court of Delaware, (Submitted: December 16, 2020. Decided: February 23, 2021).
Conclusion:
This case highlights the importance of precise language in fraud carveout provisions in M&A agreements. In cases where terms like “deliberate” or “intentional” are absent, courts have previously applied the fraud carveout to reckless behavior, leading to potential legal disputes.
By John McCauley: I help people manage M&A legal risks.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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