Originally published June 20, 2012
Keywords: M&A transactions, due diligence, risk, non-disclosure agreement, NDA
The Delaware Supreme Court recently reminded potential buyers in M&A transactions that they likely will have very limited, if any, remedies or recourse against the seller in connection with the potential transaction until an agreement is signed. In RAA Management, LLC v. Savage Sports Holding, Inc., the Delaware Supreme Court upheld a superior court ruling dismissing a claim by RAA (a private equity firm) seeking due diligence and negotiation costs that RAA incurred while pursuing an acquisition of Savage prior to learning late in the due diligence period of certain significant liabilities that Savage failed to disclose earlier in the process.1 The dismissal was upheld based on the non-disclosure agreement between the parties that included broad, though relatively standard, non-reliance and waiver clauses.
When RAA first expressed interest in purchasing Savage, the parties entered into a non-disclosure agreement prior to RAA obtaining confidential documents and information from Savage to initiate due diligence. The non-disclosure agreement (NDA) stated that Savage was not "making any representation or warranty, express or implied, as to the accuracy or completeness of ... any ... information" it provided to RAA during due diligence. Additionally, the non-disclosure agreement stated that "[o]nly those representations or warranties that are made ... in the [s]ale [a]greement when, as and if it is executed, and subject to such limitations and restrictions as may be specified [in] such a [s]ale [a]greement, shall have any legal effect."
Upon executing the non-disclosure agreement, RAA conducted preliminary due diligence on Savage. A few months later, the parties entered into a letter of intent, after which RAA conducted further due diligence. During such further diligence, now several months after signing the NDA and commencing the diligence process, RAA learned of three significant liabilities of Savage, any one of which, according to RAA, "would have caused RAA to have never attempted to acquire Savage." Additionally, according to RAA, Savage was aware of these liabilities long before they were finally disclosed to RAA and made affirmative statements to RAA during the earlier stages of the diligence process that no such liabilities existed. In light of this new information, RAA terminated negotiations before a final...