FdG Logistics LLC v. A&R Logistics Holdings, Inc., C.A. No. 9706-CB (Del. Ch. Feb. 23, 2016) (Bouchard, C.)
In this opinion, the Court of Chancery held that anti-reliance language will not bar a contracting party from asserting claims for fraud based on representations made outside of the four corners of the agreement unless that party unambiguously disclaims reliance on such statements. Additionally, the Court held that the Delaware Securities Act does not automatically apply under circumstances where parties to a merger agreement include a Delaware choice of law provision. Rather, a factual nexus must be established between Delaware and the transaction at issue to trigger application of that statute.
This action arose out of a merger transaction through which a private equity firm purchased a trucking company (the “Company”) now owned by A&R Logistics Holdings, Inc. (“A&R”). FdG Logistics LLC (“FdG”) initiated this action as the representative of the selling securityholders (the “Securityholders”) to recover a pre-closing tax refund, alleging that A&R had breached the merger agreement. In response, A&R asserted counterclaims for violation of the Delaware Securities Act and common law fraud, among other things, alleging that illegal and fraudulent practices were concealed from it during pre-merger due diligence. FdG moved for summary judgment on its tax refund claim, and the Securityholders moved to dismiss certain of the counterclaims, including A&R’s counterclaim alleging common law fraud.
In its fraud counterclaim, A&R alleged that the pre-merger materials the Securityholders provided contained knowingly false misrepresentations and omissions. In support of their motion to dismiss this counterclaim, the Securityholders argued that A&R could not establish as a matter of law that it justifiably relied on any representations made in the pre-merger materials (one of the five requirements for a fraud claim under Delaware common law) because the merger agreement contained an integration clause and also provided that the Company “was not making any representation or warranty outside of the Merger Agreement.” The Court denied the Securityholders’ motion to dismiss Count III because, although Delaware law recognizes the enforceability of contractual clauses “which identify the specific information on which a party has relied and foreclose reliance on other information,” the Court has held it “will not insulate a party from liability for its counterparty’s reliance on fraudulent statements made outside of an agreement absent a clear statement by that counterparty … disclaiming such reliance.” A disclaimer by the party accused of fraud of reliance on extra-contractual representations will not suffice. The Court held that the critical language missing from the merger agreement was “any affirmative expression [by A&R] of (1) specifically what it was relying on when it decided to enter the Merger Agreement or (2) that it is was [sic] not relying on any representations made outside of the Merger Agreement.” Without such language, the Court held that contract did not bar fraud claims based upon extra-contractual representations and, on that basis, the Court denied the Securityholders’ motion to dismiss A&R’s fraud counterclaim.
In Count II of its counterclaim, A&R asserted that the Securityholders’ statements and omissions during the sale process and in the merger agreement violated the Delaware Securities Act (the “Act”), which imposes liability on anyone who “[o]ffers, sells or purchases a security by means of any untrue statement of a material fact.” The Act does not apply to a Delaware corporation simply by virtue of its incorporation in the state. Rather, the Act “only applies where there is a sufficient nexus between Delaware and the transaction at issue.” The Court agreed with the Securityholders that Count II failed to state a claim for relief because the transaction at issue lacked a sufficient nexus to Delaware—the merger parties were not based in Delaware, no negotiations occurred in Delaware, and none of the allegedly underlying fraudulent business practices occurred in Delaware. The Court also rejected A&R’s argument that the Act should apply merely because the merger agreement contained a Delaware choice of law provision. Lastly, the Court rejected A&R’s attempt to invoke 6 Del. C. § 2708 (“Section 2708”)—which provides that parties to an agreement may agree in writing that the agreement shall be governed by or construed under Delaware law—holding that Section 2708 is not “a mechanism for the wholesale importation of every provision of Delaware statutory law into the commercial relationship of contracting parties.” Rather, Section 2708 is intended to provide certainty to parties who are subject to jurisdiction in Delaware that their choice of Delaware law regarding the construction and enforceability of their contracts will be respected.
The Court also held that A&R’s claim of unilateral mistake failed to state a claim for relief both because it would not be unconscionable to enforce the merger agreement and because rescission of the merger agreement at this point was not feasible. The Court granted FdG’s motion for summary judgment concerning the tax refund claim based on the undisputed facts, and the plain language in the merger agreement stating that pre-closing tax refunds are the property of the Securityholders and are to be paid to their representative promptly after receipt.