Drafting Nondisclosure Agreements in the M&A Context: Consider What Will Happen When the Deal Goes South

Let’s say you’re buying a business. As a condition to receiving more information, you are required to sign a nondisclosure agreement that contains all of the usual blather. You then start to sift through the mountains of information provided (and have your accountants and lawyers do the same, at considerable expense) to decide whether the company is worth purchasing, and on what terms. You like what you see, so you negotiate a letter of intent, and continue your due diligence investigation. You spend five or six months in negotiations and due diligence to the tune of many thousands of dollars (or more).

Then, let’s say at the eleventh hour you discover something really unfavorable about the company – in fact, three such issues emerge, so significant that you would never have considered buying the company at all if you had known about them. You didn’t suspect their existence, because you had been told verbally at the beginning of the process that there were no such issues. However, once found, these issues cause you to terminate negotiations.

What about the money you spent on negotiations and due diligence? Might you be able to recover that? Does it matter whether the seller intentionally withheld information about the negative issues until the last minute or simply forgot to provide it earlier?

For possible remedies, turn to the nondisclosure agreement. Let’s suppose it contained provisions something like the ones below:

The “Non-Reliance Disclaimer” Provision

Purchaser understands and acknowledges that neither Seller nor any Seller Representative is making any representation or warranty, express or implied, as to the accuracy or completeness of the Evaluation Material or of any other information concerning Seller provided or prepared by or for Seller, and none of Seller nor the Seller Representatives will have any liability to Purchaser or any other person resulting from Purchaser’s use of the Evaluation Material or any such other information. Only those representations or warranties that are made to a purchaser in the Sale Agreement when, as, and if it is executed, and subject to such limitations and restrictions as may be specified [in] such a Sale Agreement, shall have any legal effect.

The “Waiver of Claims” Provision

Purchaser understands and agrees that no contract or agreement providing for a transaction between Purchaser and Seller shall be deemed to exist between Purchaser and Seller unless and until a definitive Sale Agreement has been executed and delivered, and Purchaser hereby waives, in advance, any claims . . . in connection with any such transaction unless and until the parties shall have entered into a definitive Sale Agreement.

A plain reading of these provisions seems to preclude you from bringing any claim based on seller’s failure to provide information prior to the execution of a definitive sale agreement. Perhaps your best argument is that the most reasonable interpretation of the first provision above is that it bars claims based on mistakes or negligence in providing accurate and complete due diligence information, but not outright fraud, or is at least ambiguous on this point. You could shore this up with the argument that a court should refuse to enforce these provisions on policy grounds — courts should not enable a party to use a contract to shield itself from liability for its own fraud.

In RAA Management, LLC v. Savage Sports Holdings, Inc. [1], the Delaware Supreme Court, applying New York law (and holding that the result would be the same under Delaware law), recently rejected these arguments by a potential buyer in a case involving facts similar to those set forth above and affirmed the Superior Court’s holding dismissing the buyer’s case.

The Superior Court held that “where a sophisticated investor like RAA Management agrees to perform due diligence with the understanding that the seller disclaims any warranty of accuracy or completeness in the information it provides to the potential buyer, the due diligence is governed by . . . a buyer beware notion, that even absolves the seller from intentional fraud” (emphasis added).

The Superior Court pointed out that the language in the first provision above does not distinguish between information that is inaccurate or incomplete because of negligence or mistake and information that is inaccurate or incomplete because of alleged fraud or because it was intended to be so; therefore, the argument that the language should be construed as providing an exception for “fraudulent” or “intentional” misrepresentations has no merit. The Superior Court also found the language unambiguous, examining prior cases construing similar provisions.

The policy argument also cut no ice with the Superior Court, which reviewed prior cases that set forth Delaware’s “public policy in favor of enforcing contractually binding, written disclaimers of reliance on representations outside of a final sale agreement.” Sophisticated parties cannot negotiate such disclaimers and then claim that they in fact did rely on such representations and are entitled to relief.

The obvious lesson of RAA Management is one for potential purchasers – if your nondisclosure agreement contains provisions similar to those above, don’t proceed in reliance on the information you receive during the due diligence process; if anything does go wrong, don’t expect to recoup any of your expenses.

Is there any lesson for lawyers drafting nondisclosure agreements (other than to be aware of the issues so you can advise potential purchasers appropriately)? Could, or should, lawyers attempt to carve out fraud and intentional misstatements or omissions from a provision disclaiming reliance on information provided? Disclaimers and waivers such as those in the RAA Management nondisclosure agreement are customary and a seller’s attorney would likely make the usual noises about what is market and where the risks should be allocated. Sellers have little incentive, anyway, to withhold intentionally negative information until late in the process. Furthermore, intent would be difficult to prove – but a carve-out for intentional misstatements or omissions would at least enable a disappointed purchaser in RAA Management’s situation to avoid a dismissal.


[1] RAA Management, LLC v. Savage Sports Holdings, Inc., No. 577, 2011 (Del. May 18, 2012)


This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

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Jennifer Wilson

Jennifer Wilson

Jennifer Wilson is a Louisville-based attorney whose practice focuses on corporate and securities law; she also volunteers at a Louisville non-profit organization providing legal advice to veterans. She is a 2005 graduate of the University of Chicago Law School and a 1993 graduate of Transylvania University. Prior to practicing law, she was a Japanese-to-English translator of primarily automotive-related materials.

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