Eva Davis is a partner at Winston & Strawn LLP. This post is based on a Winston & Strawn publication by Ms. Davis, James Smith, Matthew DiRisio, and Alexandra Kushner.
So-called “reliance disclaimers” and “fraud carve-outs” in private company purchase agreements—designed, respectively, to preclude and preserve certain types of post-closing fraud claims—have taken on increased prominence for transactional lawyers drafting such agreements with an eye toward certainty of remedies in potential post-closing disputes. And with good reason. Few issues have permeated private company M&A litigation in recent years to the extent that such provisions have.
In a nutshell, non-reliance provisions seek to prevent buyers from circumventing the contractually agreed-upon remedial framework (typically, closely-negotiated indemnification rights) by including a representation that the buyer, in entering into the transaction, has not relied on any statements by the seller (or anyone else) other than the express representations and warranties in the agreement itself. Since a common law fraud claim requires both “justifiable” (or “reasonable”) reliance and reliance-in-fact, such provisions, if effective, prevent a buyer from pleading or proving a fundamental element of fraud with respect to any extra-contractual statements (including projections, diligence materials, etc.).
