Delaware Court of Chancery Weighs In on Non-Reliance Clauses
By: Phil Theodore
The scope of the representations and warranties made by the seller to the buyer in an M&A transaction involves a natural tension. The buyer attempts to cast as wide a net as possible, hoping to sweep all encounters with the seller and its representatives into the realm of actionable claims. The seller, while dumping everything it can into the data room, attempts to limit its exposure to the representations and warranties made explicitly in the transaction agreement. Several highly negotiated provisions typically reflect the agreed resolution of this tension between the buyer and seller. A recent Delaware Court of Chancery case, ChyronHego Corp. v. Wight, C.A. No. 2017-0548-SG (Del. Ch. July 31, 2018), explores the interaction between several of the typically relevant provisions.
ChyronHego (“Chyron”) purchased the equity interests of Sound & Video Creations, LLC (d/b/a Click Effects) (“Click Effects”) from a corporation controlled by the founder of Click Effects. The stock purchase agreement contained a provision purporting to limit Chyron’s reliance on information obtained from Click Effects and the seller corporation during the course of due diligence to “those representations, warranties, covenants and agreements explicitly set forth in” the stock purchase agreement. The second sentence of the anti-reliance provision included Chyron’s agreement that “no representation or warranty, express or implied, is made with respect to any financial projections or budgets.” A proviso to the second sentence stated, however, that the provision “shall not preclude the Buyer Indemnified Parties from asserting claims for Fraud or indemnification” pursuant to the indemnification provisions of the stock purchase agreement.
Chyron argued that the proviso preserved its right to sue for fraud for extra-contractual provisions rather than precluding it from doing so. In Chyron’s estimation, the proviso would be rendered meaningless, if it were interpreted to preclude Chyron from bringing fraud claims that were based on data-room projections that Chyron contended were intentionally false and misleading. The court rejected this line of reasoning, finding that the provision, taken as a whole, preserved Chyron’s right to sue for fraud, but dictated the representations that could form the basis for a fraud claim. The court concluded that Chyron could not make a claim for common-law fraud based on extra-contractual representations because justifiable reliance on the misrepresentation of another is an element of such a claim. Chyron could not, reasoned the court, have acted in justifiable reliance on the extra-contractual representations and warranties because it contractually agreed that it was not doing so. The court concluded that Chyron did not rely on extra-contractual representations and could not, therefore, seek fraud damages for intentional misstatements contained in such representations. However, Chyron could seek recovery in indemnification and for fraud damages for contractual representations. 
The holding of the Chyron court is very clear. The court stated that Delaware law enforces clauses that identify the specific information on which a party has relied and that foreclose reliance on other information, so long as the contract contains language that, when read together, can be said to add up to a clear anti-reliance clause by which the buyer has agreed that it did not rely upon statements outside the contract’s four corners. The Chyron court cautioned that standard contractual integration clauses without explicit anti-reliance language do not rise to the standard required to establish a clear anti-reliance clause.
After Chyron, sellers are likely to insist on anti-reliance clauses with renewed fervor. Chyron does not address whether a buyer who agrees to such a clause could be denied an indemnity or fraud claim because of knowledge gained or imputed from extra-contractual sources. Until this issue is resolved, buyers should not agree to anti-sandbagging provisions when the seller insists on an anti-reliance clause. In the words of one authority, “A buyer’s refusal to agree to an ‘anti-sandbagging’ clause and its insistence on the inclusion of a ‘knowledge savings’ or ‘anti-anti-sandbagging’ clause is to the buyer what the seller’s insistence on the inclusion of a ‘non-reliance’ clause is to the seller.”
This case serves as a reminder of the need to engage experienced legal counsel whether buying or selling a business. The presence or absence of a single clause or term in a contract can have far-reaching consequences.
Disclaimer – The information in this law alert is for informational purposes only and does not constitute legal advice. No attorney-client relationship has been or will be formed by any communication(s) to, from or with the law alert or author. The opinions expressed are those of the author, and decisions relating to the content belong to the author.
 ChyronHego Corp. v. Wight, C.A. No. 2017-0548-SG (Del. Ch. July 31, 2018). Slip op. at 12-13. The provision in the Chyron stock purchase agreement read as follows: Holdings and the Buyer agree that neither the Company, any Seller nor any of their respective Affiliates or advisors have made and shall not be deemed to have made any representation, warranty, covenant or agreement, express or implied, with respect to the Company, its business or the transactions contemplated by this Agreement, other than those representations, warranties, covenants and agreements explicitly set forth in this Agreement. Without limiting the generality of the foregoing, the Buyer agrees that no representation or warranty, express or implied, is made with respect to any financial projections or budgets; provided, however, that this Section 4.7 shall not preclude the Buyer Indemnified Parties from asserting claims for Fraud or indemnification in accordance with ARTICLE VII.
 Id. at 14.
 Id. at 15-16.
 Id. at 11.
 Id. at 14.
 Id. at 11-12.
 Id. at 12.
 West & Shah, Debunking the Myth of the Sandbagging Buyer: When Sellers Ask Buyers to Agree to Anti-Sandbagging Clauses, Who is Sandbagging Whom?, 11 The M&A Law 3 (January 2007).