ABA Business Law Section Spring Meeting: Fraud Carve Outs in M&A Acquisition Agreements

At yesterday’s ABA Business Law Spring Section Meeting in Denver, Colorado the program opened with several interesting sessions including “Contractual Limitations on Seller Liability in M&A Transactions.”   The presenters on this panel were Byron Egan (Jackson Walker LLP), Patricia Vella (Morris, Nichols, Arsht & Tunnell), and Glenn West (Weil, Gotschal & Manges LLP).  Among other issues, the panel discussed the importance of drafting clear and concise language to avoid extra-contractual liability. 

An area of particular concern was the drafting of fraud carve outs.  The panel strongly recommended that seller companies include provisions that state the acquisition agreement represents the exclusive agreement of the parties and does not include any statements not represented within the four corners of the document.  However, these same acquisition agreements often include carve outs for statements of fraud.  The loose definition of “fraud” by courts can cause problems because the term may include reckless statements, omissions when faced with a duty to speak, and even equitable fraud.  Mr. West and the other panelists emphasized the point that if the buyer insists upon a fraud carve out, that fraud be defined and limited to intentional misstatements (ie. lying).  Further, because these transactions often involve numerous agents of both the bidder and seller, defining “knowledge persons” will limit the actors that the fraud carve out applies to, thereby limiting future liability.  Courts, especially within Delaware, pay great deference to sophisticated parties and clear intentions contained within the document.  The panel noted taking these extra precautionary steps gives the seller further security in the case of a buyer’s remorse.