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Nina C. Baccala
“Don’t lie, but if you must, don’t lie about matters covered by your
representations in the contract.”1
INTRODUCTION
From almost the beginning of time the notion of caveat emptor (“let the buyer beware”)
has been a part of American business dealings.2 In more recent years, however, buyers who have
been deceived by sellers have successfully obtained judicial intervention.3 On the other hand,
there has always been a countervailing American tradition of freedom of contract.4 Courts are
1
Todd E. Lenson & David I. Schultz, Lies, Damn Lies and M & A Fraud, THE CORPORATE COUNSELOR, Aug. 2006,
at 2, available at http://www.stroock.com/SiteFiles/Pub458.pdf.
2
See CHARLES L. KNAPP, NATHAN M. CRYSTAL & HARRY G. PRINCE, PROBLEMS IN CONTRACT LAW 483 (5th ed.
2003).
3
See, e.g., Conway v. Romarion, 557 S.E.2d 54, 55 (Ga. Ct. App. 2001) (involving false statements and deceptive
conduct by the sellers of a home attempting to hide extensive pet damage from the buyers).
4
ABRY Partners V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032, 1059 (Del. Ch. 2006).
5
Lenson & Schultz, supra note 1, at 2-3. See also discussion infra Part II.B.4 (reconciling the law of fraud with
acquiring them from other private equity firms.6 Another private equity firm, B, approaches A
and offers to sell to A what appears to be a robust, growing, highly profitable business.7 A
engages in what should by all reasonable accounts be an arms-length transaction with B and buys
the portfolio company, C, only to learn after the deal closes that B provided false financial
statements and valuations of C’s worth.8 Once A learns of this it naturally attempts to rescind the
deal.9 B, however, refuses to allow A to do so, and A’s only remedy thereafter is to pursue a
fraudulent inducement claim in a civil lawsuit and request rescission from a court of law.10
The above hypothetical is unfortunately not merely just that, it is what actually happened
in the case of ABRY Partners V, L.P. v. F & W Acquisitions LLC.11 Vice Chancellor Leo E.
Strine, Jr. of the Delaware Chancery Court in ABRY upheld prior Delaware case law in
determining that “a party cannot promise, in a clear integration clause of a negotiated agreement,
that it will not rely on promises and representations outside of the agreement and then shirk its
own bargain in favor of a ‘but we did rely on those other representations’ fraudulent inducement
6
The term “private equity” commonly refers to any type of equity investment in which the target’s equity is not
freely tradeable on a public stock market, though such private equity firms themselves often invest in companies
listed on public exchanges and subsequently take them private. Wikipedia, the Free Encyclopedia,
1756-N).
8
Id. at 1-2.
9
Id. at 67.
10
ABRY, 891 A.2d at 1040.
11
891 A.2d 1032.
a contract exculpate a contracting party from a rescission or damages claim based on false
representation of fact made within the contract itself?”13 V. C. Strine answered that question by
holding:
To the extent that the Stock Purchase Agreement purports to limit the Seller’s
exposure for its own conscious participation in the communication of lies to the
Buyer, it is invalid under the public policy of this State. That is, I find that the
public policy of this State will not permit the Seller to insulate itself from the
possibility that the sale would be rescinded if the Buyer can show either: 1) that
the Seller knew that the Company’s contractual representations and warranties
were false; or 2) that the Seller itself lied to the Buyer about a contractual
representation and warranty. …[T]he Buyer may not escape the contractual
limitations on liability by attempting to show that the Seller acted in a reckless,
grossly negligent, or negligent manner.14
In reaching that holding, however, V.C. Strine paid lip service to the overriding public policy of
not wanting to allow parties to be able to negotiate a “license to commit fraud.”15 Though the
holding left open the possibility of a victory for the buyer if it ultimately proved that the seller
intentionally participated in lies within the four corners of the Agreement itself, 16 this case could
have been decided in a way that would have been more consonant with the underlying public
policy concerns raised by its unique facts.17 Because the truthfulness of the provisions within the
Agreement itself was at issue, it is the contention of this Comment that V.C. Strine overlooked
12
Id. at 1057.
13
Id. at 1059 (emphasis added).
14
Id. at 1064.
15
MBIA Ins. Corp. v. Royal Indem. Co., 426 F.3d 204, 218 (3d Cir. 2005) (quoting CP Kelco U.S., Inc. v.
Pharmacia Corp., No. 01-240-RRM, 2002 WL 31230816, at *5 (D. Del. Oct. 2, 2002)).
16
Ruling in ABRY Partners v. Providence Equity Case Has Lessons for Buyers and Sellers, PRIVATE EQUITY
UPDATE (Goodwin Procter LLP, Boston, Mass.), Mar. 14, 2006, at 1-2, available at
www.goodwinprocter.com/getfile.aspx?filepath=/Files/Publications/PE_ABRYProvidence_3_14_06.pdf.
17
See infra Part II.B.
precedent: To allow the plaintiff buyer rescission due to the defendant seller’s breach by non-
performance.18
With that in mind, Part I of this Comment delineates the background of the ABRY case, as
well as existing Delaware precedent.19 Part II of this Comment then argues that, though a trial
on the merits would have probably led to the right result,20 a better precedent would have been to
allow the plaintiff rescission based on a theory of breach by non-performance.21 As the public
policy against fraud is a “strong and venerable one” that is largely founded on the societal
consensus that lying is wrong, Part II also considers the public policy implications of the ABRY
holding, a precedent that as crafted could lead to harsh inequities in future M & A cases.22 This
Comment then concludes by considering the consequences that a decision such as ABRY will
have on the M & A world, as the latter will likely have to live with the decision for an indefinite
amount of time.23
18
See infra discussion Part II.
19
See infra Part I.
20
See Ruling in ABRY Partners v. Providence Equity Case Has Lessons for Buyers and Sellers, supra note 16, at 2-
3.
21
See infra discussion Part II.A.
22
See Posting of Gordon Smith to Conglomerate, http://www.theconglomerate.org/2006/02/contracting_to_.html
(Feb. 28, 2006). In this paper, “M & A” is used to refer to mergers and acquisitions.
23
On May 25, 2006 the parties settled this lawsuit, with the defendant making an unspecified payment to the
plaintiff in exchange for a minority stake in the portfolio company. Marrecca Fiore, ABRY Settles Over F +W Sale,
proceed to trial nor go up on appeal, the twenty-five page opinion dismissing the defendant’s motion to dismiss
1. Parties
This case involved a multiplicity of related entities.25 Plaintiffs ABRY Partners, L. P. and
ABRY Partners V Affiliated Investors (“ABRY”) are Delaware incorporated limited partnerships
private equity firm that owns several media companies throughout the United States, and was on
Defendant F & W Acquisition, Inc. was owned by Defendant F & W Acquisition LLC,
who was in turn owned by Defendant Providence Equity Partners, Inc. and several of its
affiliates (“Providence”).28 Providence, the seller in this case, is a private equity firm
discusses concepts that are germane to nearly all M & A contracts involving private equity firms, with its holding
currently binding on all future parties who come before the Chancery Court for relief. See Franc Del Fosse, Risk
Allocation in Private Company M & A Contracts: The Delaware Court Ruling in the ABRY Partners Case, THE
CORPORATE COMMUNICATOR (Snell & Wilmer L.L.P., Phoenix, Ariz.), April 2006, at 1. Thus, this Comment strives
how presented in this Comment; however, such configurations are not relevant to the arguments presented herein
Cincinnati, Ohio and incorporated in Delaware.30 The Company publishes special interest
magazines and books both in the United States and internationally.31 Some of its representative
publications include Popular Woodworking, Scuba Diving, Family Tree Magazine, Country’s
Best Log Homes, and Writer’s Digest.32 At the time immediately before the Stock Purchase
Agreement was consummated, Providence (through its affiliates) owned all of the shares of the
Company.33
Providence first acquired the Company in 2002.34 Though the Company had its own key
managers who had no previous affiliation with Providence, the latter, through its principals,
nonetheless interacted with the Company on a regular basis.35 In December 2004 Providence
decided to sell the Company through an M & A auction process,36 and began contacting potential
29
Id.
30
ABRY, 891 A.2d at 1036.
31
Id.
32
Id.
33
Id.
34
Id. at 1037.
35
Id. at 1037-38.
36
See Lenson & Schultz, supra note 1, at 1.
37
Amended complaint, supra note 7, at at 17, 30.
38
Id. at 30.
the twelve months ending on June 30, 2005.39 Providence then provided financial statements for
the year ending December 31, 2004 and the first quarter of 2005.40 In reliance on these
statements ABRY agreed to pay $500 million for the Company41 and, accordingly, on June 11,
2005 executed a Stock Purchase Agreement to memorialize the terms of the purchase.42 The
Several provisions of the parties’ Stock Purchase Agreement were at issue in this case.44
Acquiror acknowledges and agrees that neither the Company nor the Selling
Stockholder has made any representation or warranty, expressed or implied, as
to the Company or any Company Subsidiary or as to the accuracy or
completeness of any information regarding the Company or any Company
Subsidiary furnished or made available to Acquiror and its representatives,
except as expressly set forth in this Agreement . . . and neither the Company nor
Selling Stockholder shall have or be subject to any liability to the Acquiror or
any other Person resulting from the distribution to the Acquiror, or Acquiror’s
use of or reliance on any such information or any information, documents or
material . . . in expectation of, or in connection with, the transactions
contemplated hereby.45
seller’s liability to those claims and representations made within the four corners of the
39
ABRY, 891 A.2d at 1038. “EBITA” is a determination of a company’s free cash flow, measured by its earnings
neither the latter nor the Company had made any representation or warranty as to the accuracy of
any information about the Company except as set forth in the Stock Purchase Agreement itself,
and that neither Providence nor the Company would have any liability to ABRY or any other
person for any extra-contractual information made available in connection with the contemplated
sale.48
Pertaining to the cause of ABRY’s fraudulent inducement claim, § 3.6 of the Agreement
promised that:
The Company Financial Statements: (i) are derived from and reflect, in all
material respects, the books and records of the Company and the Company
Subsidiaries; (ii) fairly present in all material respects the financial condition of
the Company and the Company subsidiaries at the dates therein indicated and
the results of operations for the periods therein specified; and (iii) have been
prepared in accordance with GAAP applied on a basis consistent with prior
periods except, with respect to the unaudited Company Financial Statements, for
any absence of required footnotes and subject to the Company’s customary year-
end adjustments.49
This is one of the most important representations in any acquisition agreement.50 The
representation about financial statements is “[p]robably one of the two most important
Along with § 3.6 was § 8.2(h)(i), which required Providence to provide an Officer’s
Certificate stating that “the closing conditions relating to the accuracy of not only [Providence’s],
but also the Company’s, representations and warranties were satisfied, that the Company and
47
Id.
48
Id. at 1041.
49
ABRY, 891 A.2d at 1041-42.
50
Id. at 1042.
51
LOU R. KING & EILEEN T. NUGENT, NEGOTIATED ACQUISITIONS OF COMPANIES, SUBSIDIARIES AND DIVISIONS §
section is that it brought the principal-agent relationship between Providence and the Company
Providence also agreed to indemnify ABRY for any inaccuracies within the Agreement
itself:
[Providence] agrees that, after the Closing Date, the Acquiror and the Company
. . . shall be indemnified and held harmless by [Providence] from and against,
any and all claims, demands, suits, actions, causes of actions, losses, costs,
damages, liabilities . . . to the extent such Damages . . . have arisen out of or . . .
have resulted from . . . an inaccuracy, misrepresentation, breach of, default in, or
failure to perform any of the representations, warranties or covenants given or
made by the Company or [Providence] in this Agreement . . .54
indemnification right, however.55 § 9.1(c) limits the aggregate liability of Providence to the
amount of $20 million dollars, while § 9.9(a), the Exclusive Remedy Provision, provides that
“the indemnification rights . . . shall be the sole and exclusive remedy of the Acquiror . . . with
52
ABRY, 891 A.2d at 1043.
53
Though the ABRY court was somewhat ambivalent as to the extent of the agency relationship between Providence
and the Company, such relationship is easily inferred from Providence’s controlling ownership position and the fact
that Providence had, on its own behalf, delivered the Officer’s Certificate to ABRY at closing, warranting the
representations made within the four corners of the Agreement. See Del Fosse, supra note 23, at 2; supra text
accompanying note 52. Examining the contours of such a relationship is beyond the scope of this Comment,
however.
54
ABRY, 891 A.2d at 1043-44 (emphasis omitted).
55
See id. at 1044-45.
56
Id. at 1044.
financial and operational problems.57 Most notable of all, it appeared to ABRY that Providence
and the Company management, working in concert, had manipulated the Company’s financial
statements in order to fraudulently induce ABRY into purchasing the Company at an excessive
price.58 Once ABRY became aware that the actual financials were different than what
Providence had represented, the former commenced an investigation, which revealed that the
Company’s financial statements were indeed fraudulent and that Providence’s representations as
to the accuracy of the financial statements had been false.59 Such fraudulent actions violated
GAAP,60 harmed the Company as an ongoing business, and made the Company’s financial
statements materially false and misleading.61 Upon concluding their investigation, ABRY
determined that the true value of the Company at the time of purchase had been closer to $400
million than $500 million, and that essentially they had purchased the Company for a grossly
57
See Amended complaint, supra note 7, at 49.
58
ABRY, 891 A.2d at 1038.
59
Amended complaint, supra note 7, at 65.
60
GAAP (Generally Accepted Accounting Principles) are accounting rules used to prepare, present, and report
financial statements for publicly-traded companies and many privately-held companies. Wikipedia, the Free
16, 2007). GAAP is not written in law, although the U.S. Securities and Exchange Commission (SEC) requires that
it be followed in financial reporting by publicly-traded companies. Id. Currently, the Financial Accounting
Standards Board (FASB), organized by the SEC, sets accounting principles for the profession and promulgates them
transaction and take back ownership of the Company.63 Providence refused and ABRY filed a
1. Fraudulent Inducement
Delaware has adopted the position of the Restatement Second of Contracts on the issue of
liability for fraudulent inducement: “If a party’s manifestation of assent is induced by either a
fraudulent or a material misrepresentation by the other party upon which the recipient is justified
in relying, the contract is voidable by the recipient.”65 A buyer aggrieved by fraud can typically
seek to avoid a contract or in the alternative recover damages.66 If the buyer seeks merely to
avoid the contract, it is enough to show that the misrepresentation was either intentional or
material.67 The buyer, however, must be able to show justifiable reliance on the representations
made by the seller.68 A failure of justifiable reliance is fatal to an otherwise well-pled fraudulent
inducement claim.69
2. Anti-Reliance Clauses
62
ABRY, 891 A.2d at 1040.
63
Id.; Amended complaint, supra note 7, at 67.
64
ABRY, 891 A.2d at 1040.
65
See id. at 1054 n.46 (quoting RESTATEMENT (SECOND) OF CONTRACTS § 164(1) (1979)).
66
Id. at 1054.
67
See id. at 1048 n.26 (quoting E. ALLAN FARNSWORTH, 1 FARNSWORTH ON CONTRACTS § 4.12 (3d ed. 2004)).
68
See Progressive Int’l Corp. v. E.I. Du Pont De Nemours & Co., No. 19209, 2002 WL 1558382, at *6 (Del. Ch.
July 9, 2002).
69
See id. at *7.
representations of fact not contained in the contract had been made to it and further explicitly
promised that it was only relying on representations of fact within the contract, that same buyer
could still come forward later and assert that an extra-contractual representation of fact induced
its decision to sign the contract.70 In addressing claims involving contracts that are the product of
jurisprudence has taken a different approach.71 Delaware, and the Chancery Court in particular,
have honored such anti-reliance clauses in which contracted parties have disclaimed reliance on
extra-contractual representations: “For a contract to bar a fraud in the inducement claim, the
contract must contain language that, when read together, can be said to add up to a clear anti-
reliance clause by which the plaintiff has contractually promised that it did not rely upon
statements outside the contract’s four corners in deciding to sign the contract.”72 The language of
the clause itself, however, must be explicit and, as this is a standard, not a rule, each case will
70
ABRY, 891 A.2d at 1056, 1056 n.49; Norton v. Poplos, 443 A.2d 1, 2 (Del. Super. Ct. 1982).
71
See ABRY, 891 A.2d at 1035, 1056, 1056 n.50 (“[T]he case law of this court gives effect to non-reliance
provisions that disclaim reliance on extra-contractual representations . . . .”). See also MBIA Ins. Corp. v. Royal
Indem. Co., 426 F.3d 204, 218 (3d Cir. 2005) (applying Delaware law and predicting that “when sophisticated
parties have inserted clear anti-reliance language . . . Delaware’s highest court will enforce it to bar a subsequent
fraud claim.”).
72
Kronenberg v. Katz, 872 A.2d 568, 593 (Del. Ch. 2004).
73
See Great Lakes Chemical Corp. v. Pharmacia Corp., 788 A.2d 544, 555 (Del. Ch. 2001).
In ABRY it is beyond dispute that the accuracy of the financial statements were material
to the Stock Purchase Agreement at issue.74 In fact, the word “material” is used twice in the
Agreement’s language addressing the financial statements.75 Furthermore, the facts also establish
that the financial statements were intentionally misleading.76 Given that ABRY had a valid
fraudulent inducement claim in that the accuracy of the financial statements were material to the
Agreement and that those statements were intentionally fraudulent,77 the rest of the case turned
on the reasonableness of that reliance in light of a strong Delaware precedent upholding anti-
reliance clauses.78 Reliance was at issue, however, not because ABRY didn’t have the right to
rely on something as material as the Company’s financial statements, but because of the
Agreement’s anti-reliance clause.79 Accordingly, “[t]he burden [was] that of demonstrating that
[the] rescission claim [was] based on false representations of fact embodied within the four
corners of the Stock Purchase Agreement itself.”80 Ironically, it is for this very reason that a
74
See notes 50-51 and accompanying text.
75
See supra text accompanying note 49.
76
Amended complaint, supra note 7, at 35 (“If Peggy [of ABRY] has it in her head that she is going to pay 10X
[multiple of EBITDA], let’s try to use part of the day to get her to the right EBITDA number.”).
77
See supra notes 50-51 and accompanying text.
78
See supra discussion Part I.B.2.
79
See ABRY Partners V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032, 1056 (Del. Ch. 2006); supra notes 45-46
would have obtained an equitable result without offending any of Delaware’s existing anti-
reliance precedent.82
the party first guilty of a material breach of contract cannot complain if the other party
subsequently refuses to perform. . . . All that the plaintiff must show is freedom from fault with
recognizing breach by non-performance, the Chancery Court has adopted the position of the
81
See infra text accompanying notes 92-94.
82
See Homan v. Turoczy, No. 19220, 2005 WL 2000756, at *18 (Del. Ch. Aug. 12, 2005) (upholding the anti-
reliance clause against an assertion of fraudulent inducement based on plaintiff’s reliance on oral representations
made outside of the contract); Kronenberg v. Katz, 872 A.2d 568, 594 (Del. Ch. 2004) (integration clause alone,
without specific anti-reliance language, will not bar recovery for fraudulent inducement); H-M Wexford LLC v.
Encorp, Inc., 832 A.2d 129, 147 (Del. Ch. 2003) (upholding liability for fraudulent inducement where
representations made within the four corners of the agreement itself later proved false; language of the anti-reliance
clause only excluded reliance on representations made outside of the contract); Progressive Int’l Corp. v. E.I. Du
Pont De Nemours & Co., No. 19209, 2002 WL 1558382, at *7 (Del. Ch. July 9, 2002) (plaintiff relied upon oral
representations made outside of the contract; recovery barred by anti-reliance clause); Great Lakes Chemical Corp.
v. Pharmacia Corp., 788 A.2d 544, 556 (Del. Ch. 2001) (upholding the anti-reliance clause against an assertion of
fraudulent inducement based on plaintiff’s reliance on oral representations made outside of the contract); see also
MBIA Ins. Corp. v. Royal Indem. Co., 426 F.3d 204, 217 (3d Cir. 2005) (no liability for fraudulent inducement
where anti-reliance clause disclaimed representations made both outside and inside the four corners of the contract).
substantially impairs the value of the contract to the injured party at the time of the breach that it
is just in the circumstances to allow him to recover damages based on all his remaining rights to
performance.”87 A total breach relieves or “discharges” the non-breaching party from his
remaining duties under the contract.88 The language of the Chancery Court on this matter is even
more unambiguous: “A party is excused from performance under a contract if the other party is
in material breach thereof.”89 Furthermore, while the Restatement speaks of damages as the sole
remedy for breach by non-performance,90 Delaware has gone a step further in its jurisprudence
and has recognized, in addition to an award of damages, the remedy of rescission for breach by
non-performance.91
The court in ABRY could have easily granted rescission for breach of the Agreement due
to Providence’s failure to deliver to ABRY financial statements that were “true and correct in all
material respects, were prepared in accordance with GAAP . . . and present fairly in all material
85
See Biolife Solutions, Inc. v. Endocare, Inc., 838 A.2d 268, 278 (Del. Ch. 2003); Moore Business Forms, Inc. v.
Cordant Holdings Corp., No. 13911, 1998 WL 71836, at *8 n.35 (Del. Ch. Feb. 6, 1998, revised Mar. 5, 1998).
86
RESTATEMENT (SECOND) OF CONTRACTS § 235(2) (1979).
87
Id. § 243(4).
88
See id. §§ 243(1), 245.
89
Biolife, 838 A.2d at 278.
90
RESTATEMENT (SECOND) OF CONTRACTS § 243(1) (1979) (“[A] breach by non-performance gives rise to a claim
Company and Providence were both in breach of material terms of the Agreement.93 As a result
of Providence’s total breach, ABRY was discharged from further duty under the contract and
should have been granted rescission, since discharge would have thereafter excused ABRY from
the limitations of the Agreement’s Exclusive Remedy Provision.94 Since this particular case
turned on the failure of the promise of delivery of accurate financial statements (representations
within the contract), rather than on the actual inaccuracies contained in the financial statements
themselves (representations made outside of the contract), the ABRY court would have been able
to grant rescission without offending any of Delaware’s existing anti-reliance precedent, as the
anti-reliance provision in this case only prohibited reliance on representations made outside of
the contract’s four corners.95 Additionally, the law of integration would have been completely
maintained, as integration issues arise only when one of the parties steps outside of the four
corners of the document, while non-performance is based on what has occurred in relation to
92
ABRY Partners V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032, 1042 (Del. Ch. 2006) (emphasis added).
93
See supra notes 50-51 and accompanying text.
94
Cf. Del Fosse, supra note 23, at 3. In the alternative, the court could have simply recognized the discharge and
then proceeded to consider ABRY’s fraudulent inducement claim for damages, as the occurrence of the discharge
would have also excused ABRY from the indemnity cap of $20 million. Cf. id.
95
For example, breach by non-performance would not be possible if the fraud had occurred solely outside of the
four corners of the contract, rather than within a term of the contract itself. See, e.g., H-M Wexford LLC v. Encorp,
Inc., 832 A.2d 129, 142-143, 144-147 (Del. Ch. 2003) (distinguishing between representations that occur outside of
the contract and representations made within the contract). See also text accompanying note 45.
96
See supra note 82.
inquiry involved in discerning one’s intent.97 Had breach by non-performance been recognized
by the court as a basis for allowing ABRY’s fraudulent inducement claim instead of the creation
of a fact-specific “what the parties knew” standard, the decision whether or not to grant
rescission under circumstances such as those at issue in ABRY would not ever have to turn on
well as fraud.98 Such a result would be especially advantageous to the M & A world, in that both
in M & A and in securities law, “fraud” is generally understood to encompass intentional as well
breach by non-performance does not take the breaching party’s intent into account, such a
finding would have been more consistent with the bodies of law governing M & A transactions
buyer who knew of the non-performance and nevertheless chose to close on the contract
anyway.101 By not exercising the option to terminate at the time of contracting, a buyer’s right to
later assert breach by non-performance would essentially be waived, because in that instance the
97
Cf. Ruling in ABRY Partners v. Providence Equity Case Has Lessons for Buyers and Sellers, supra note 16, at 2-
the exception that the defendant need not know or believe that its statement is false. Stephenson v. Capano Dev.,
Buyer’s ability to assert a fraud claim . . . may be adversely affected if the Buyer discovers an
inaccuracy before closing but fails to disclose the inaccuracy to the Sellers until after the
closing.”103 Conversely, having the inquiry turn on the seller’s intent alone would only
perpetuate instances where the buyer closes on a deal in which he or she knew of the breach
beforehand but failed to object to it.104 No reasonable business entity would or should agree to
allow the other party to the contract to lie within that contract.105 And if they do agree to such a
deal, equity could not possibly sanction rescission under those circumstances.106
Though V.C. Strine did not appear morally troubled by the result of his holding,107 others
have not been so quick to embrace it, and some have predicted that ABRY rests on shaky legal
analysis.108 V.C. Strine himself noted that the terms of an anti-reliance clause would stand only
“[a]bsent an overriding public policy.”109 That being said, and given that there is a public policy
interest in truthfulness, that interest should apply with more force, not less, to contractual
102
Cf. id.
103
Id. (quoting COMM. ON NEGOTIATED ACQUISITIONS, AM. BAR ASS’N, MODEL STOCK PURCHASE AGREEMENT 186
(1995)).
104
Cf. id.
105
See Posting of Larry Ribstein to Ideoblog, http://busmovie.typepad.com/ideoblog/2006/02/should_a_court_.html
representations, a law intolerant of fraud should abhor parties that make them knowing they are
false.111 To hold otherwise would be tantamount to promoting a public policy that permits
lying.112
ABRY’s holding raises several additional public policy concerns.113 The first is the
“double liar” problem.114 Allowing a party to sue for fraudulent inducement in the face of an
anti-reliance clause to the contrary has the problem of “excus[ing] a lie made by one contracting
party in writing—the lie that it was relying only on contractual representations and that no other
representations had been made—to enable it to prove that another party lied orally or in writing
outside the contract’s four corners.”115 In such a scenario a plaintiff would be pointing a finger at
the defendant, calling him a liar, while at the same time being a liar himself.116 To allow a buyer
to prevail on its claim in such an instance would be equivalent to sanctioning the buyer’s own
fraudulent conduct.117
The ABRY holding does not make this problem go away, in that if the buyer promised not
to sue for rescission even if the seller lied to it about the accuracy of a contractual representation,
110
Id. at 1057.
111
Id.
112
See supra note 15 and accompanying text.
113
See supra text accompanying note 1.
114
See ABRY, 891 A.2d at 1058.
115
Id.
116
See id.
117
Id.
lied within the contract suggests that the former was untruthful in the first instance.118 By instead
recognizing the plaintiff’s discharge from further duty under the contract, however, the plaintiff
would no longer be fostering a “double liar” scenario, in that he or she would have been
equitably discharged from the remaining requirements of the contract that would purport to limit
the seller’s liability.119 “Given the potential for misrepresentation from each side of the
agreement, the safer route therefore would be to leave parties that can protect themselves to their
own devices, enforcing the agreement that they actually fashion.”120 Thus, a finding based on
recognition of Providence’s breach due to its non-performance would resolve the “double liar”
problem inherent in V.C. Strine’s holding,121 by making the dispute turn on the parties’ actual
performance rather than on a subjective inquiry of what each party’s intent was when forming
the contract.122
118
Id. at 1064 n.85.
119
See RESTATEMENT (SECOND) OF CONTRACTS § 245 (1979) (“Where a party’s breach by non-performance
contributes materially to the non-occurrence of a condition of one of his duties, the non-occurrence is excused.”).
120
MBIA Ins. Corp. v. Royal Indem. Co., 426 F.3d 204, 218 (3d Cir. 2005). This language is especially pertinent
when one considers that the Agreement at issue in ABRY did not contain an anti-reliance clause disclaiming liability
for representations within the contract itself. Supra text accompanying note 45; see also In re IBP, Inc.
Shareholders Litig., 789 A.2d 14, 74 (Del. Ch. 2001) (“To the extent that a contracting party chose not to negotiate
for specific language regarding an issue, the most plausible inference is that the issue was simply not fundamental
as a fraudster who tries to sell portfolio companies based on false representations, that Seller will
pay a price.”123 A theory of market efficiency, though a desirable goal, is just not tenable in a
situation such as the one at bar, considering that in hotly sought-after M & A deals, buyers, to
increase the likelihood of winning an M & A auction, are regularly willing to accept various
seller-oriented provisions.124 This is particularly common in M & A auctions, such as the one in
ABRY.125 As buyers tend to view these provisions as mere boilerplate having less significance
than the agreement’s primary business terms, the M & A market is not likely to do justice within
itself.126 Though one could argue that after ABRY buyers should be more informed, doesn’t such
a holding defeat the very goal of efficiency that the court was aiming for?127 Now that buyers
will have to be so excessively leery of what the seller knew and didn’t know, that will likely
impede market efficiency much more so than a decision that would have allowed rescission of
The holding in ABRY will also surely impede another efficiency goal: minimizing the
number of civil lawsuits filed.129 In the M & A environment, disputes involving alleged fraud
123
ABRY, 891 A.2d at 1061.
124
Lenson & Schultz, supra note 1.
125
See supra note 36 and accompanying text.
126
See Lenson & Schultz, supra note 1.
127
Cf. Ruling in ABRY Partners v. Providence Equity Case Has Lessons for Buyers and Sellers, supra note 16, at 3.
128
Cf. supra text accompanying note 97.
129
Cf. Ruling in ABRY Partners v. Providence Equity Case Has Lessons for Buyers and Sellers, supra note 16, at 3.
much growth; inherent in such growth, however, is increased competitive pressures and less
collegiality than what was a generation ago.131 Cases such as ABRY indicate that the typically
insular world of sophisticated private equity firms is becoming less averse to resolving disputes
through the very public means of litigation.132 Thus, litigation between private equity firms “is
unlikely to decrease.”133 A holding such as ABRY’s that now requires a factual analysis of the
parties’ intent, rather than a legally-mandated adherence to the explicit terms of the agreement’s
four corners,134 will only likely increase the amount of litigation in an environment that is
V.C. Strine would not come out differently in ABRY for another reason: an overwhelming
desire on his part to uphold freedom of contract.136 In the opinion, V.C. Strine notes the “wealth-
creating and peace-inducing effects of civil contracts.”137 V.C. Strine advises that courts, when
fashioning common law limits on contractual freedoms, avoid inhibiting economic activity that
“might be valuable to the parties and society more generally.”138 If freedom of contract is so
130
Id.
131
Id.
132
See Del Fosse, supra note 23.
133
Ruling in ABRY Partners v. Providence Equity Case Has Lessons for Buyers and Sellers, supra note 16, at 3.
134
See supra notes 120-122 and accompanying text.
135
See Ruling in ABRY Partners v. Providence Equity Case Has Lessons for Buyers and Sellers, supra note 16, at 3.
136
See ABRY Partners V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032, 1059-60 (Del. Ch. 2006).
137
Id. at 1060 n.66 (quoting Libeau v. Fox, 880 A.2d 1049, 1056 (Del. Ch. 2005), aff’d in part, rev’d in part, 892
seriously[,]”139 and have granted rescission based on a failure of performance of the Agreement’s
very terms.140 V.C. Strine makes another assertion: “There remains much harshness in the world,
and such entities are unlikely candidates to place at the head of the line for judicial protection,
especially when the legislature is free to consider providing such relief.”141 Though this is a true
statement in that judicial overreaching is never good policy,142 it is nonetheless the decision
maker’s role to enforce agreements based on an objective discernment of the terms of the parties’
agreement.143 But if that decision maker enforces the wrong agreements, those that shouldn’t be
enforced, then we are as far from freedom of contract as we would be were the decision maker to
refuse to enforce any agreements at all.144 “The institution [of freedom of contract] . . . is as
specifically, in achieving true freedom of contract, a decision maker should allow the parties to
buy and sell at whatever price they like and on whatever terms, as long as the agreement meets
the test of voluntariness, for one should not be bound unless they affirmatively intended to be
139
Homan v. Turoczy, No. Civ.A. 19220, 2005 WL 2000756, at *17 (Del. Ch. Aug. 12, 2005).
140
See supra note 95.
141
ABRY, 891 A.2d at 1062.
142
See, e.g., Lochner v. New York, 198 U.S. 45, 64-65 (1905) (invalidating a democratically-enacted employment
regulation because of the Court’s belief that the provision was not a good idea).
143
See THE FEDERALIST NO. 78, at 474 (Garry Wills ed., 1982) (“The interpretation of the laws is the proper and
Compulsory Terms and Unequal Bargaining Power, 41 MD. L. REV. 563, 569 (1982).
145
Id.
to be bound by Providence’s fraudulent conduct, a policy true to freedom of contract would have
granted rescission of the Agreement due to the latter’s breach by non-performance, instead of
CONCLUSION
Thus, ABRY Partners V, L.P. v. F & W Acquisitions LLC was wrongly decided and its
holding should be reconsidered by the Chancery Court in future cases.149 As V.C. Strine so
rightfully notes “it is difficult to identify an economically-sound rationale for permitting a seller
to deny the remedy of rescission to a buyer when the seller is proven to have induced the
contract’s formation or closing by lying.”150 For a court to choose to follow an approach when
allow an entity who entered a contract off the hook when the contract becomes inconvenient for
them; rather, it is because enforcement of the contract threatens a well-recognized public policy
interest of concern to the business community.151 Such an alternative holding in ABRY would
have obtained equity for the plaintiffs, who had contracted for certain affirmative representations
within the four corners of the Agreement that were not met, while simultaneously upholding
146
Id. at 569-70.
147
Id. at 569.
148
See id. at 570.
149
See supra discussion Part II.
150
ABRY, 891 A.2d at 1036.
151
See id. at 1061 n.75 (noting that the courts will not allow rescission as “a sword for parties to avoid their
contracts when avoidance suits their personal interests, but as a shield to protect the community in general when the
performance would not reward carelessness or parties who fail to use the protections within the
contract that they bargained for,153 but would instead circumvent the evidentiary uncertainty
inherent in trying to ascertain one’s intent or knowledge base, thus avoiding “a tour through [a
defendant’s] cranium”154 Additionally, the problems of “double liar,” economic inefficiency, and
excessive litigation are avoided.155 Lastly, granting rescission due to breach by a party’s non-
performance best balances the law of fraud with the desire for freedom of contract and actually
reconciles the two without dicta that is reminiscent of the dead doctrine of economic substantive
due process.156
Once ABRY was settled, both corporations sent a memo to investors, stating “‘there has
been an end to the pending litigation, which we believe is a win-win solution and in the best
interests of both parties. [The settlement] will . . . avoid the expenditure of additional finance and
It’s time now for the Chancery Court to recognize a separate but related principal:
152
See supra note 82.
153
See Homan v. Turoczy, No. 19220, 2005 WL 2000756, at *18-19 (Del. Ch. Aug. 12, 2005).
154
Skycom Corp. v. Telstar Corp., 813 F.2d 810, 814 (7th Cir. 1987).
155
See discussion supra Part II.B.1-3.
156
See Marc C. Niles, Ninth Amendment Adjudication: An Alternative to Substantive Due Process Analysis of
Personal Autonomy Rights, 48 UCLA L. REV. 85, 137 n.165 (2000) (the “‘substantive due process’ doctrine was an
invention designed to authorize what was, in fact, the illegitimate judicial imposition of a theory of economic
efficiency and the morality of economic relations on the people of the states and the nation.”).
157
Fiore, supra note 23.
158
See Lenson & Schultz, supra note 1, at 3.