Buyer Can’t Sue Seller for Not Telling Buyer About Pending Loss of Major Customer

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M&A Stories

December 10, 2020

Introduction

It is very important for a prospective buyer of a business to do smart due diligence to validate the purchase price. However, there is always a risk that the seller won’t tell you the truth when asked. That’s when the dense, boring, legal boilerplate in a merger, asset purchase or stock purchase agreement comes into play.

The deal

This was a strategic deal between two companies that provided services to clients in the healthcare field. One of the services the seller provided its clients was a Nurse Advice Line. The seller’s rights and obligations under those Nurse Advice Line contracts was an important part of the deal. Humana was one of the seller’s top customers and the source of several of the contracts.

Approximately two weeks before the asset purchase agreement was signed, Humana and the seller participated in a phone call during which the seller learned that Humana intended to terminate the majority of its nurse advice line contracts. Humana advised Seller that written notice of the termination would follow. The seller did not tell the buyer of the conversation. To the contrary, the seller instructed its employees not to disclose Humana’s intent to anyone.

The deal closed with the buyer in the dark.

The lawsuit

After the transaction closed, the buyer discovered that Humana intended to terminate the contracts.

The seller had represented and warranted in the asset purchase agreement that it had not received any written contract termination notices. And that was true as of the closing. But the seller had received oral notification of Humana’s intent to terminate its contracts before the closing. Furthermore, the seller had told the buyer during negotiations that it had not received notice of any customer’s intent to terminate the service contracts.

Thus, the buyer sued the seller and its principal in a Delaware Superior Court for fraud accusing it of lying. The seller asked the court to dismiss with prejudice the claim because the buyer had agreed in the asset purchase agreement to sue only on breach of representations and warranties contained in the asset purchase agreement, and that the seller had only represented and warranted that it had not received any written notifications from customers of an intent to terminate service contracts, and that the only Humana notification of intent to terminate contracts was in fact given orally.

The court agreed and dismissed the buyer’s claim, saying that the buyer can’t “escape the contractual limitations to which it expressly agreed. Delaware law enforces sophisticated parties’ agreements to limit their reliance to contractual representations.”

This case is referred to as Infomedia Group, Inc. v. Orange Health Solutions, Inc., C.A. No. N19C-10-212 AML CCLD, Superior Court of Delaware, (Submitted: April 23, 2020.

Decided: July 31, 2020) 

Comment

So what boilerplate language was in this purchase agreement that allowed the seller to avoid a fraud claim for denying the fact that it knew that Humana intended to terminate its contracts?

There were two innocuous looking boilerplate provisions that the buyer agreed to: (1) that the only representations that seller was making on the deal were contained in the asset purchase agreement (2) that the buyer was only relying on the seller representations and warranties made in the asset purchase agreement, and specifically the buyer disclaimed relying upon anything said by the seller during negotiations.

By John McCauley: I help people manage M&A risks involving privately held companies.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291 

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Posted in contracts, due diligence, extra-contractual fraud, fraud in business sale, non-reliance clause Tagged with: ,

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