[This insight was written by Bob Holmen for Fortis Advisors.  Additional insights may be found at Fortis Insights]

It is common practice to include an integration clause in contracts, stating that the contract represents the entire agreement between the parties.  That said, in disputes between parties to M&A transactions, buyers often attempt to establish liability based on pre-closing statements made by the seller as part of the due diligence process.  In response, sellers attempt to add a disclaimer regarding any pre-closing statements; however, based on recent case law, that disclaimer may not be enough to eliminate post-closing liability.

We have looked at data in our Forsite™ M&A Deal Tool from over 500 deals where Fortis Advisors has served as shareholder representative, and determined that in 47% of all M&A transactions, the seller includes a representation that it is not making any other representations other than those set forth in the merger agreement.  Only 25% of merger agreements include a statement from the buyer that it is relying solely on its own investigation and the express representations and warranties set forth in the merger agreement.  Accordingly, in a majority of all merger agreements, neither the seller nor the buyer disclaim extra-agreement reliance, opening the door for post-closing claims based on pre-closing statements made outside of the merger agreement.

The Delaware Court of Chancery recently weighed in on this issue, making it even more difficult for sellers.  In FdG Logistics LLC v. A&R Logistics Holdings, Inc., the Court held that a seller’s representation that it was not making any representations outside of the merger agreement was insufficient to prevent the buyer from bringing a fraud claim based on extra-agreement statements.  Because of the strong public policy considerations on anti-fraud, only the buyer directly including a non-reliance provision will serve to fully integrate the representations and warranties in an agreement and insulate the seller against claims based on pre-closing statements.

While fraud claims at some level can always overcome the language of an agreement (e.g., if the buyer alleges fraud in the inducement, pre-closing statements are critical in determining the merits of the claim), the best practice is to negotiate for the buyer to include a non-reliance statement—a seller’s disclaimer will not be sufficient.

[This insight was written by Bob Holmen for Fortis Advisors.  Additional insights may be found at Fortis Insights]

Most executives negotiating merger agreements understand that communications with their respective counsels are protected from disclosure under the privilege afforded attorney-client communications.  However, not all executives understand that it is their respective companies which own the privilege rather than the individual executives.  Further, unless expressly stated in the merger agreement, upon consummation of the merger, the buyer now owns and controls the privilege, allowing the buyer to access the privileged information on the merger transaction.

In 2013, the Delaware Court of Chancery confirmed this principal in Great Hill Equity Partners IV LP v. SIG Growth Equity Fund I LLLP, 80 A.3d 155 (Del. Ch. 2013).  The court found that absent express language in the merger agreement excluding attorney-client communications from the transferred assets, the buyer will own the attorney-client communications post-closing.

Since that ruling, we have noticed a sharp increase in the number of merger agreements containing language retaining for the seller all pre-closing attorney-client privileged communications related to the merger transaction.  In mining the data in the Forsite™ M&A Deal Tool, which includes deal points from over 500 recent M&A transactions, we found that in 2013 only 14% of merger agreements included an express retention by the seller of attorney-client communications.  That rapidly climbed to 44% in 2014 and 52% in 2015.

While the buyer may argue against such a retention clause, and the seller may have reasons to not argue for retention, we nonetheless expect the frequency of such retention language to increase as this issue becomes a standard negotiation point in merger transactions.