Prairie Capital III, L.P v. Double E Holding Corp., C.A. No. 10127-VCL (Del. Ch. Nov. 24, 2015) (Laster, V.C.)
In this decision, the Delaware Court of Chancery granted in part and denied in part a motion to dismiss claims for fraud, aiding and abetting fraud, and conspiracy to commit fraud arising out of the acquisition of a private company. The Court granted the motion with respect to some of the fraud claims, finding that an integration clause, in conjunction with a clause affirmatively representing that the purchaser relied only on the representations and warranties found in the stock purchase agreement (the “SPA”), operated to preclude claims based upon extra-contractual representations. Accordingly, the Court dismissed all fraud claims to the extent they were based upon representations outside the SPA and any alleged omissions.
The SPA related to Prairie Capital Partners’ (“Prairie Capital”) sale of one of its portfolio companies, Double E Parent LLC (the “Company”), to counterclaim plaintiff Incline Equity Partners (“Incline”). When Incline expressed interest in purchasing the Company, Company management and its financial advisor pitched the Company as a growth story that was likely to continue growing. The Court noted that at no point in the discussions with Incline did Prairie Capital meet or communicate directly with Incline; instead, Prairie Capital choreographed the discussions and controlled the flow of information from behind the scenes. Incline and Prairie Capital ultimately reached an agreement for Incline to purchase all of Prairie Capital’s interests in the Company through a stock purchase, which was conditioned, among other things, on the Company meeting its monthly sales goals through closing.
After the deal closed, the seller, Prairie Capital, claimed that it was entitled to the release of funds being held in escrow and litigation ensued. Incline brought counterclaims alleging, among other things, that while negotiations over the SPA were ongoing, the Company’s CEO and CFO falsified sales data to make it appear that the Company had met its monthly sales goals for March 2012, when in fact the Company had not actually met those goals. This allegedly falsified sales data was provided to Incline, and purportedly relying in part on the data, Incline executed the SPA with the Prairie Capital and closed the acquisition on April 4, 2012. The SPA contained an “exclusive representations” clause, which expressly stated that Incline relied solely upon the representations and warranties contained in the SPA, and a standard integration clause.
In assessing the viability of Incline’s fraud claim, the Court found that the SPA’s exclusive representations clause together with the integration clause combined to create anti-reliance provisions that precluded any claim based upon representations other than those contained in the SPA itself. Accordingly, the Court dismissed Incline’s fraud claim to the extent that it was based upon representations – such as the allegedly falsified sales data the Company provided to Incline – not found in the SPA. The Court also dismissed Incline’s fraud claim to the extent that it was based upon alleged omissions, reasoning that the exclusive representations provision in the SPA meant that the SPA itself contained the entire universe of information upon which Incline agreed to rely, and Incline could not therefore assert a claim for fraud arising out of anything other than the representations in the SPA, which necessarily excluded material information Incline claimed was withheld from it.