Buyer Beware - Case Requires Representations in a Purchase and Sale or Merger Agreement to be More Thorough Than Ever (Mergers and Acquisitions)

April 1, 1997 Advisory

In August 1996, the Second Circuit issued a decision in Harsco Corp. v. Segui that has potentially significant ramifications for parties involved in the purchase or sale of the stock or assets of a company. The decision addresses the effect of a "no other representations" clause contained in a purchase and sale agreement. A typical "no other representations" clause might read as follows:

"Buyer acknowledges that Seller makes no representations or warranties other than those specifically set forth herein. Buyer further acknowledges that Seller makes no representations or warranties as to any other information or documents made available to Buyer and its counsel, accountants and advisors, except as specifically set forth herein."

Whatever their actual form, these clauses explicitly disclaim all representations that may have been made by or on behalf of the seller of the business but are not contained within the four corners of the final purchase and sale agreement. In the Harsco case, the Second Circuit stated that such clauses have their intended effect and that purchasers are precluded from later claiming they were defrauded into buying the company's assets or stock, unless the basis for the fraud is specifically contained in the purchase and sale agreement.

The rationale relied upon by the court is that where both parties are knowledgeable and sophisticated with respect to this type of transaction, they are assumed to negotiate with one another on equal footing and at arms length, Accordingly, all provisions contained in their written agreement will be given full effect. If a "no other representations" clause is contained within a purchase and sale agreement the court will assume that the parties have mutually agreed that the representations made in the purchase and sale agreement are the only representations made in the transaction. A purchaser seeking to recover damages will not be able to make a claim for fraudulent inducement if the basis for such claim is on alleged misrepresentations not found in the agreement. Furthermore, since there is no violation of the express terms of the purchase agreement there is no valid breach of contract or indemnification claim against the seller.

Practice Pointer

Sellers wishing to limit their liability for representations that may have been made, intentionally or inadvertently, outside the four corners of the purchase and sale agreement should specifically disclaim all representations not included in the agreement. Similarly, a party contemplating the purchase of a company who wishes to rely on representations made by the seller during negotiations or due diligence should insist that those representations be included in the purchase and sale agreement, especially when the agreement states that the seller has disclaimed all representations not contained in the written agreement.