Confidentiality Agreements: Delaware Courts Remind Us Why They ...

agreement is entered into with the potential target, the company’s flexibility to engage in a
hostile takeover bid of the target at a later time may be greatly diminished.
Reminder #2: A Seller Might Lie During Due Diligence and the Buyer Probably
Can’t Do Much About It
Another common provision in confidentiality agreements is a non-reliance clause. This type
of clause typically states that a buyer may not rely on the completeness or accuracy of any
information provided by the seller during due diligence, and that no sale contract exists
between the buyer and the seller unless and until the parties enter into a definitive
agreement. What happens when a seller is not completely forthcoming with a buyer during
due diligence? Does the buyer have any recourse?
The Delaware courts recently addressed these questions. In the case RAA Management LLC
v. Savage Sports Holdings, Inc., Del., No. 577, 2011 (decided May 18, 2012), Savage
approached RAA to discuss a possible merger and the parties entered into a confidentiality
agreement. The agreement stated that Savage made no representations about the accuracy
or completeness of any information it provided to RAA, and that Savage would not be liable
to RAA based on RAA’s reliance on such information, unless Savage breached any
representations or warranties made in a later sale agreement. Additionally, RAA waived any
claims against Savage relating to the potential transaction unless and until the parties
entered into a sale agreement.
At the beginning of the discussions between Savage and RAA, Savage stated that there
were “no significant unrecorded liabilities or claims against Savage.” However, during RAA’s
due diligence process, Savage disclosed three major liabilities, which ultimately caused RAA
to abandon the transaction. RAA sued, alleging that, had it known of those liabilities at the
outset, it never would have pursued the negotiations and that because Savage had
knowingly covered up the liabilities earlier in the process, Savage should be liable for the
$1.2 million in costs that RAA incurred in performing its due diligence.
The Delaware court dismissed the complaint based on the nonreliance and waiver clauses.
On appeal, RAA argued that the nonreliance clause barred claims based on negligence or
mistake, but should not be extended to cover fraudulent or intentional misrepresentations.
Additionally, RAA argued that the Court should not enforce the nonreliance clause on policy
grounds because such a rule would give sellers an incentive to lie during the initial stages of
a transaction.
The Delaware Supreme Court rejected RAA’s arguments, finding that the language of the
agreement made no distinction between negligence and fraud, and that Delaware’s public
policy favors enforcing written nonreliance clauses. The Court noted that, at the time of the
agreement, both parties knew how nonreliance clauses had been interpreted by Delaware
courts and that RAA could not escape the terms it agreed to in its written agreement.
The RAA case serves to remind us that, while due diligence is a tool designed to help buyers
evaluate a possible transaction, buyers should not rely on statements or materials provided
by a seller during due diligence. Many confidentiality agreements preserve the seller’s ability
to limit its liability with respect to the quantity, quality, and timing of disclosures made
during the due diligence process, perhaps even in the case where the seller makes
fraudulent or misleading statements.