All Bets Off: Negotiating and Navigating the Fraud Exception in - - PowerPoint PPT Presentation

All Bets Off: Negotiating and Navigating the Fraud Exception in Private Company M&A

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THURSDAY, FEBRUARY 7, 2013

Presenting a live 90-minute webinar with interactive Q&A

Wilson Chu, Partner, K&L Gates, Dallas Mary R. Korby, Partner, K&L Gates, Dallas P . Gregory Hidalgo, Partner, K&L Gates, Dallas 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

February 7, 2013

Wilson Chu K&L Gates, LLP, Dallas Wilson.Chu@klgates.com Srinivas Raju Richards, Layton & Finger PA raju@rlf.com Mary R. Korby K&L Gates, LLP, Dallas Mary.Korby@klgates.com

• P. Gregory Hidalgo

K&L Gates, LLP, Dallas Greg.Hidalgo@klgates.com

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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)

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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)

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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

• r equity.

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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)

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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

• r 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.

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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)

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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).

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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.

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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.

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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

• r equity.

ABA Model Stock Purchase Agreement, Second Edition)

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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.

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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.

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Wilson Chu (Mergers & Acquisitions)

Wilson Chu is a partner in the Dallas office of K&L Gates, LLP where co-heads the Firm’s Global M&A

• Practice. His practice focuses on US and cross-border M&A and other strategic transactions for

clients ranging from Fortune 500 serial acquirors to private equity funds to high-growth, high-profile technology companies in the US and abroad. While he has deal experience in a wide range of industries, Wilson’s practice is heavily-weighted in the technology sector. In a recent mid-year scorecard on www.infostor.com, for example, two of Wilson’s deals made the list of “Top 10 Storage Acquisitions in 2010.” As the creator of the ABA’s influential M&A Deal Points Studies (published by the ABA’s Mergers & Acquisitions Committee), Wilson is widely recognized for his thought leadership that continues to shape M&A practice in the US and abroad. Wilson's leadership also extends to diversity in the legal profession with a number of transformative "Firsts," including, co-founding of the Texas Minority Counsel Program and founding of the NAPABA Partners Committee of the National Asian Pacific American Bar Association. He is also a member of the Advisory Boards of www.DealLawyers.com and Practical Law Company (US), Conference Chair and Founder of the Asia M&A Forum in Hong Kong, cosponsored by the Inter-Pacific Bar Association and Euromoney’s International Financial Law Review, and Conference Co-Chair and Founder of the University of Texas M&A Institute. Wilson is recognized as a leading M&A lawyer in numerous legal publications, including, Chambers, Who’s Who Legal - The International Who’s Who of Merger & Acquisition Lawyers, The Best Lawyers in America -Corporate Law and Mergers & Acquisitions Law, Lawdragon, and Texas Super Lawyers.

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Greg Hidalgo (Mergers & Acquisitions)

Greg Hidalgo is a partner in the Dallas office of K&L Gates, LLP. Greg counsels and provides innovative and client-centered solutions for publicly held and privately owned clients in the areas of mergers and acquisitions, joint ventures, securities transactions, corporate governance and other general corporate matters. His client relationships span a variety of industries, including business process outsourcing, commercial real estate services, consumer products, energy, healthcare, manufacturing, private equity, retail, and telecommunications. Greg recently presented on "Trends in International Business Transactions - A Comparison of Standards in the U.S., Asia, Latin America and in Europe," at The Center for American and International Law 47th Annual Symposium on Global Markets. Representative M&A transactions include:

• Odyssey HealthCare, Inc.’s $1 billion merger with Gentiva Health Services, Inc.
• Dell Inc.’s acquisition of Ocarina Networks, Inc.
• HM Capital’s $660 million sale of Sturm Foods Inc. to Treehouse Foods, Inc.
• Trammell Crow Company’s $2.2 billion merger with CB Richard Ellis Group, Inc.
• ACE Cash Express, Inc.’s $430 million merger with JLL Partners

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Mary R. Korby (Mergers & Acquisitions)

Mary Korby is a corporate partner in the Dallas office. She advises boards and companies regarding securities law compliance, stock exchange listings, disclosure issues and corporate governance, including sensitive fiduciary duty matters. In addition, she advises companies regarding tender offers, joint ventures, and mergers and acquisitions, including complex cross-border public and private transactions in diverse industries such as chemicals, defense, recycling, green energy, aviation and manufacturing. She also represents private equity and hedge fund investors in acquisitions, dispositions and public and private debt and equity offerings and advises in restructurings and acquisitions involving distressed companies and companies in bankruptcy.

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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.

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Disclaimers

This presentation is intended merely to provide a general introductory overview of certain trends and developments affecting M&A transactions. This presentation is not intended to provide a complete analysis of the matters covered, but rather is intended to be used and referred to in conjunction with a more comprehensive oral presentation regarding those matters. Accordingly, there are potentially important exceptions and qualifications that are not reflected in this presentation. This presentation does not necessarily reflect the personal views of the speakers or the views of K&L Gates LLP. The sample provisions included in these materials are intended only to serve as examples of hypothetical provisions. All provisions must be carefully tailored to reflect the specific terms of the transactions to which they relate; accordingly, it may be necessary to make substantial modifications to these sample provisions before they can be used in the context of any proposed transactions. The reader should not attempt to operate motor vehicles while reading this presentation.