To what extent can parties to a merger agreement contract around Delaware common-law protections against extracontractual fraud? Sparton v. O’Neil, C.A. No. 12403-VCMR (Aug. 9), a recent Delaware Court of Chancery decision, reinforces a line of Delaware precedent holding that anti-reliance disclaimers in merger agreements can be used to defeat subsequent buyer claims for intentional fraud outside of the four corners of the contract, and that such claims can be defeated as early as the pleading stage.
In Sparton, Sparton Corp. (the buyer) sued certain stockholders and optionholders (the sellers) of Hunter Technology Corp. (the acquisition target) for fraud and breach of contract, alleging in part that the sellers had presented fabricated financial statements in order to induce Sparton to purchase Hunter for an inflated purchase price of $55 million. According to the allegations of the complaint, the sellers collaborated to overstate certain accounts receivable of Hunter prior to the calculation of an agreed-upon working capital estimate by the parties. This overstatement allegedly convinced Sparton to agree to an artificially high working capital amount and an artificially low cap for any working capital adjustment. The complaint further alleged that the lead representative for the seller group had specifically assured Sparton before closing that “any resulting post-closing working capital adjustment would be minimal,” further encouraging Sparton to agree to the adjustment cap that the sellers sought.
