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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
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
WEDNESDAY, MARCH 22, 2017
Wilson Chu, Partner, McDermott Will & Emery, Dallas
P. Gregory Hidalgo, Partner, McDermott Will & Emery, Dallas
Jessica C. Pearlman, Partner, K&L Gates, Seattle
Srinivas M. Raju, Director, Richards Layton & Finger, Wilmington, Del.
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All Bets off: Negotiating and Navigating the Fraud
Exception in Private Company M&A
Wednesday, March 22, 2017
Jessica Pearlman
K&L Gates, Seattle
Gregory Hidalgo
McDermott Will & Emery, Dallas
Srinivas Raju
Richards, Layton & Finger,
Wilmington, DE
Wilson Chu
McDermott Will & Emery, Dallas
6
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)
7
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)
8
9
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.
10
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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)
12
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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.
14
1. The defendant made a representation to
the plaintiff;
2. The representation was material;
3. That representation was false;
4. When the defendant made the
representation, the defendant either
knew the representation was false or
made the representation recklessly, as a
positive assertion without knowledge of
its truth;
5. The defendant made the representation
with the intent that the plaintiff act on it;
6. The plaintiff relied on the representation;
and
7. The representation caused the plaintiff
injury.
In Re International Profit Assocs., 274 S.W.3d 672, 678 (Tex. 2009).
Elements of fraud in Texas Elements of fraud in Delaware
1. A false representation, usually one of
fact, made by the defendant;
2. The defendant's knowledge or belief that
the representation was false, or was
made with reckless indifference to the
truth;
3. An intent to induce the plaintiff to act or
to refrain from acting;
4. The plaintiff's action or inaction taken in
justifiable reliance upon the
representation; and
5. Damage to the plaintiff as a result of
such reliance
Gaffin v. Teledyne, Inc., 611 A.2d 467, 472 (Del. 1992)
15
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).
16
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.
17
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.
18
19
Exclusive Remedy – The Fraud Exception…
Except for fraud or intentional
misrepresentation, 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)
20
Exclusive Remedy – The Fraud Exception
Except for fraud or willful misconduct, 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.
21
Exclusive Remedy – The Fraud Exception…
Except for intentional fraud committed
with the Knowledge of Sellers (in which
case, solely against the Person or
Persons committing or alleged to have
committed such 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.
22
Wilson Chu (Mergers & Acquisitions)
Wilson Chu is a partner in the Dallas office of McDermott Will & Emery. He focuses his practice on
mergers and acquisitions (M&A), joint ventures and other strategic transactions, as well as related
corporate governance, for clients ranging from Fortune 500 serial acquirers to private equity funds and
high-growth, high-profile technology companies in the United States and abroad. While he has
experience in a wide range of industries, his practice is heavily weighted in the technology and health
care sectors, with an emphasis on the converging fields of healthtech and fintech.
His representative clients include the following:
AmerisourceBergen Corporation (NYSE: ABC)
Renren, Inc. (NYSE: RENN)
Sabre Corporation (NASDAQ: SABR)
Xerox Corporation (NYSE: XRX)
7-Eleven, Inc.
As the creator of the American Bar Association's (ABA) influential M&A Deal Points Studies, Wilson is
widely recognized for his thought leadership that continues to shape M&A practice globally. He was a
founding co-chair of the ABA'S M&A Market Trends Subcommittee, which publishes the Deal Points
Studies.
Wilson is founding co-chair of the University of Texas Mergers & Acquisitions Institute, the country's
leading private company M&A conference, the founding chair of the International Finance Law
Review/Inter-Pacific Bar Association's Asia M&A Forum in Hong Kong, Asia's leading M&A law
conference, and founding chair of the Mergers & Acquisitions Section of the Dallas Bar Association.
23
Greg Hidalgo (Mergers & Acquisitions) Greg Hidalgo is a partner in the Dallas office of McDermott Will & Emery. His practice reflects his
passion for collaborating with clients to achieve their business objectives and to develop meaningful
and enduring client relationships.
Greg has extensive experience counseling and providing innovative and client-centered solutions for
publicly held and privately owned clients in the areas of mergers and acquisitions (M&A), joint
ventures, corporate governance and other corporate-related matters. He also represents clients in
corporate finance and capital market transactions.
Greg's client relationships span a variety of industries, including technology, commercial real estate
services, consumer products, energy, health care, manufacturing, private equity, retail and
telecommunications.
Greg began his career as a certified public accountant with Ernst & Young LLP, where he worked from
1987 to 1990. He regularly utilizes his financial experience when representing clients.
Greg speaks frequently on various hot topics at conferences and on webinars, including issues such
as negotiating the fraud exception, the black art of winning M&A auctions, transitioning closely held
businesses, and the JOBS Act.
24
Jessica Pearlman (Mergers & Acquisitions)
Jessica Pearlman is a partner in the corporate group of K&L Gates LLP and resides in the Seattle office.
Ms. Pearlman represents emerging and established companies in various corporate, securities, and
finance matters, with an emphasis on mergers and acquisitions for both public and private clients,
domestic and international. Ms. Pearlman has particular depth of experience in various technology
sectors, including healthcare applications, software, social media, data security, data storage, mobile
applications, and search and search engine optimization, as well as in digital and traditional media,
biotechnology, and transportation.
Ms. Pearlman is a frequent presenter on mergers and acquisitions topics and was selected for inclusion in
The International Who's Who of Merger and Acquisition Lawyers, Who's Who Legal (2015) and as a
Washington Super Lawyer and one of the Top Women Attorneys in Washington (2013-present), as well as
a Washington Rising Star (2006-2009). Ms. Pearlman was also a winner of the 2013 ILO Client Choice
Awards. Ms. Pearlman is an adjunct professor at the University of Washington School of Law, is active in
leadership roles with the Mergers & Acquisitions Committee of the American Bar Association’s Section of
Business Law and is a member of the Thomson Reuters Business Law Solutions Advisory Board.
25
Srinivas Raju (Mergers & Acquisitions) Srinivas M. Raju is a member of the Wilmington, Delaware law firm of Richards, Layton & Finger, P.A.
His practice focuses on corporate advisory, corporate governance, transactional, and complex
litigation matters relating to Delaware corporations, limited partnerships and limited liability companies.
Srini has litigated numerous corporate control, corporate governance, and contractual disputes in the
Delaware Court of Chancery and the Delaware Supreme Court. He has also advised corporate boards,
special committees, and general partners with respect to governance and transactional issues.
Srini is frequent speaker on fiduciary duty and governance issues, particularly with respect to
Delaware limited partnerships and limited liability companies. He has also published numerous
articles on these topics, including articles published in The Business Lawyer, Securities &
Commodities Regulation, Delaware Journal of Corporate Law, and Insights, and is co-author of a book
titled Special Committees: Law and Practice (Oxford 2011). Srini has been recognized in Chambers
USA; Benchmark Litigation; The Best Lawyers in America; Lawdragon; PLC Which Lawyer; Super
Lawyers; and The Legal 500.
26
Disclaimers
This presentation (including the remarks of the speakers) is intended merely to provide a general
introductory overview of certain trends and developments affecting M&A transactions. It is not intended to
provide a complete analysis of the matters covered and there are potentially important exceptions and
qualifications that are not reflected herein or wherever Google-able.
The sample provisions included in these materials are intended only to serve as examples of hypothetical
(i.e., make-believe) provisions.
M&A is an art not a science, so do your homework. For example, all provisions must be carefully tailored to
reflect the specific terms of the transactions to which they relate.
This presentation:
• does not necessarily reflect the views of the speakers or their firms, and the speakers reserve the right
to flip-flop as the context requires.
• is not (i) provided in the course of and does not create or constitute an attorney-client relationship, (ii)
intended as a solicitation, (iii) intended to convey or constitute legal advice, and (iv) a substitute for
obtaining legal advice from a qualified, high-dollar attorney.
Past performance does not guarantee future results. We do not use “cookies” or MSG. Do not text when
driving, walking or reading this presentation. If you have an interest in this presentation that lasts more
than 4 hours, get medical help right away.
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