Presenting a live 90-minute webinar with interactive Q&A Negotiating and Navigating the Fraud Exception in Private Company Acquisitions Key Considerations For Drafting a Fraud Exception to an M&A Contractual Indemnification Provision THURSDAY, FEBRUARY 12, 2015 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Wilson Chu, Partner, K&L Gates , Dallas P . Gregory Hidalgo, Partner, K&L Gates , Dallas Jessica C. Pearlman, Partner, K&L Gates , Seattle Srinivas M. Raju, Director , Richards Layton & Finger , Wilmington, Del. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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All Bets off: Negotiating and Navigating the Fraud Exception in Private Company M&A February 12, 2015 Jessica Pearlman P. Gregory Hidalgo K&L Gates, LLP, Dallas K&L Gates, LLP, Dallas Jessica.Pearlman@klgates.com Greg.Hidalgo@klgates.com Srinivas Raju Wilson Chu Richards, Layton & Finger PA K&L Gates, LLP, Dallas raju@rlf.com Wilson.Chu@klgates.com
Exclusive Remedy The rights set forth in [the Agreement’s Indemnification provisions] will be the exclusive remedy for breach or inaccuracy of any of the representations and warranties set forth in Articles 3 and 4 and will be in lieu of all remedies available in law or equity. (ABA Model Stock Purchase Agreement, Second Edition) 6
Punitive Damages for Fraud and Fraudulent Inducement: Showing "Malice" Under Delaware law, punitive damages are available when: "Unlike contract damages, which are intended solely to compensate the non-breaching party for its expectation loss regardless of the willfulness of the breach, punitive damages are intended to punish tortfeasors whose wrongful conduct was committed with willfulness, wantonness, or malice. Punitive damages are generally permitted for conversion where the conversion "involves elements of . . . ill will, malice, recklessness, wantonness, oppression, insult, willful or conscious disregard of the plaintiffs rights, or other aggravating circumstances." Data Mgm't Internationale, Inc., v. Saraga, No. C.A. No. 05C-05-108, (Del. Chanc. 2007). In Delaware, malice requires: "malice requires a showing of "ill-will, hatred, or intent to cause injury." Malice also may be found after a party has demonstrated a reckless disregard for another's trade secrets with the intent to cause injury. The key requirement in finding malice in this context, therefore, is a showing that one party acted with the intent to cause injury to the other." Great American Opportunities, Inc.., v. Cherrydale Fundraising, LLC, Civil Action No. 3718-VCP, (Del. Chanc. 2010). In Texas… With respect to punitive damages for fraud or fraudulent inducement, Texas requires a showing of "malice," which is statutorily defined as: "a specific intent by the defendant to cause substantial injury or harm to the claimant" Tex. Civ. Prac. & Rem. Code Section 41.001(7) 7
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Exclusive Remedy – The Fraud Exception Except for fraud , the rights set forth in [the Agreement’s Indemnification provisions] will be the exclusive remedy for breach or inaccuracy of any of the representations and warranties set forth in Articles 3 and 4 and will be in lieu of all remedies available in law or equity. 9
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Non-Reliance Buyer has not relied on Sellers with respect to any matter in connection with Buyer’s evaluation of the Company other than the representations and warranties of Sellers specifically set forth in Article 3 [ Seller’s representations and warranties ], and Buyer acknowledges that Sellers are not making any representations or warranties, express or implied, of any nature whatsoever with respect to the Company other than specifically set forth in Article 3. ( ABA Model Stock Purchase Agreement, Second Edition) 11
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“No Other Representations”: Enough? No Other Representations and Warranties. Except for the representations and warranties contained in this Article 3 (including the related portions of the Disclosure Schedules), none of Seller, the Company or any other Person has made or makes any other express or implied representation or warranty , either written or oral, on behalf of Seller or the Company, including any representation or warranty as to the accuracy or completeness of any information regarding the Company furnished or made available to Buyer and its Representatives (including the Confidential Information Memorandum prepared by [financial advisor] dated ____ and any information, documents or material made available to Buyer in the Data Room, management presentations or in any other form in expectation of the transactions contemplated hereby) or as to the future revenue, profitability or success of the Company, or any representation or warranty arising from statute or otherwise in law. 13
Elements of fraud in Texas Elements of fraud in Delaware 1. The defendant made a representation to 1. A false representation, usually one of the plaintiff; fact, made by the defendant; 2. The representation was material; 2. The defendant's knowledge or belief that the representation was false, or was 3. That representation was false; made with reckless indifference to the truth; 4. When the defendant made the representation, the defendant either 3. An intent to induce the plaintiff to act or knew the representation was false or to refrain from acting; made the representation recklessly, as a positive assertion without knowledge of 4. The plaintiff's action or inaction taken in its truth; justifiable reliance upon the representation; and 5. The defendant made the representation with the intent that the plaintiff act on it; 5. Damage to the plaintiff as a result of such reliance 6. The plaintiff relied on the representation; and Gaffin v. Teledyne, Inc., 611 A.2d 467, 472 (Del. 1992) 7. The representation caused the plaintiff injury. In Re International Profit Assocs., 274 S.W.3d 672, 678 (Tex. 2009). 14
The additional element for fraudulent inducement in Texas Under Texas law, fraudulent inducement requires the same elements plus one additional element of proof: that the plaintiff entered into a binding agreement as the result of the fraud. Haase v. Glazner, 62 S.W.3d 795, 797-98 (Tex. 2001). Fraudulent inducement has the same elements of fraud under Delaware common law. Smith v. Mattial, C.A. No. 4498-VCN, at * n. 37 (Del. Chanc. 2010). 15
Exclusive Remedy – The Fraud Exception… Except for intentional fraud , the rights set forth in [the Agreement’s Indemnification provisions] will be the exclusive remedy for breach or inaccuracy of any of the representations and warranties set forth in Articles 3 and 4 and will be in lieu of all remedies available in law or equity. 16
Exclusive Remedy – The Fraud Exception… Except for intentional fraud committed with the Knowledge of Sellers , the rights set forth in [the Agreement’s Indemnification provisions] will be the exclusive remedy for breach or inaccuracy of any of the representations and warranties set forth in Articles 3 and 4 and will be in lieu of all remedies available in law or equity. 17
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