Health, Inc. v. Squid Soap, L.P., C.A. No. 4410-VCL (Del. Ch. July 20,
2010), read opinion here. Prior Delaware
Court of Chancery decisions in this case were highlighted here.
involves a claim against the purchaser of a company and its major law firm for
fraud in connection with an Asset Purchase Agreement (APA). The essence of this
business litigation claim is that the purchaser,
Airborne, fraudulently induced the seller, Squid Soap, to enter into
the APA based on misrepresentations about Airborne's ability to grow Squid
Soap's business under Airborne's supposedly superior auspices. After the APA
closed, major costs incurred by Airborne in connection with the settlement of a
class action lawsuit and regulatory investigations, that were pending prior to
the APA, severely hampered Airborne and impaired its ability to grow Squid
Soap--so much so that Squid Soap claims that after the APA closed,
Airborne "killed Squid Soap in its infancy". The Court granted a
motion to dismiss the claims.
claimed that Airborne was liable to it based on extra-contractual common law
fraud. The Court recited the five elements for such a cause of action at pages
12 and 13 of the slip opinion, and also described the three species of fraud,
each of which was asserted by Squid Soap: (1) affirmative falsehood; (2)
active concealment; and (3) breach of duty to speak. The Court analyzed each in
turn. The Court's "teachable moment" to M & A lawyers
is offered in part two below.
found that Airborne did not make a material misrepresentation of fact either
outside the agreement or in the APA. The representations described at page 10
of the slip opinion regarding the pending litigation against Airborne were
sparse and not breached. After reciting the extensive statements made by
Airborne to induce Squid Soap to do the deal, the Court described them all as
"mere puffery" that because of vagueness are "immunized
from regulation". Airborne's bragging about its "very strong brand
name" and "established market presence" were not statements that
Squid Soap should have relied on. According to the Court: : "A
sophisticated seller like Squid Soap, advised by expert counsel, could not
reasonably rely on Airborne's boasts and blandishments."
observed that Squid Soap's counsel was an AmLaw 100 firm that the Court
expected to have "asked questions" based on due diligence checklists
and questionnaires that the Court said should have been discussed
with Airborne as part of the negotiations for the APA. Footnote 1 of
the opinion provided several sources where such checklists are available. The
Court found nothing in the record to suggest that Squid Soap's counsel either
asked questions before the closing on the APA about the litigation that became
problematic, or that Airborne withheld information about the litigation if
requested to provide it. Nor did Airborne offer a "half-truth designed to
put Squid Soap off the scent ...." Teachable moment: The Court
expects M & A lawyers (at least at major firms) to use due
diligence checklists or questionnaires to ask about key facts, such as pending
litigation, before a deal is consummated, and/or provide for specific
representations in the APA about such key facts. Otherwise, a
subsequent fraud claim will face an uphill battle.
Duty to Speak
There was no
exception based on a special relationship between the parties, so the Court
described the general rule that "one party to a contract is under no
duty to disclose facts of which he knows the other is ignorant even if he
further knows the other, if he knew of them, would regard them to be
material in determining his course of action in the transaction in question."
(citing Restatement (Second) of Torts, Section 551 cmt a (1977)). That is,
if one's M & A lawyer does not ask about key material facts, and
does not obtain representations about those key material facts
that later become a source of problems after the deal closes, one should not
expect a fraud claim based on non-disclosure of those material facts to have a
high probability of success.
Nor did the
Court find a disclosure obligation based on a partial disclosure that left a
misleading impression even if the partial disclosure was technically true. As a
result, in concluding its opinion, the Court dismissed the aiding and abetting
claims against the buyer's law firm.
Delaware business litigation case summaries and commentary on Delaware
Corporate and Commercial Litigation Blog, a blog hosted by Francis G.X.
Pileggi, of Fox Rothschild LLP.