In recent years, private equity (PE) firms have bought and sold more businesses, at higher prices, than ever before. This growth has raised the stakes for all parties. For sellers, in particular, bigger deals mean the claims buyers may bring after closing pose greater risk.

Sellers have worked hard to manage this risk. Contract provisions have been deployed to shorten the amount of time for which representations will survive, to narrow the kinds of representations that can give rise to a claim, and to restrict the range of persons and entities who can be sued. Increasingly, representations and warranties insurance has become the only source of recovery for buyers claiming a breach.

But at least in Delaware, the courts have sought to impose some limit on the ability of sellers to insulate themselves from post-closing claims. In a line of cases following 2006's ABRY Partners decision,1 Delaware courts have struck a balance between a seller's traditional right to use contract provisions to reduce exposure and the equally long-standing public policy against permitting intentional misrepresentations in contracts. Where these courts have drawn the line is with claims of fraud: If a buyer can make a compelling claim that representations in an acquisition agreement were false and made by the defendant with knowledge of their falsity, then contractual limitations on liability will generally not protect sellers, or other parties who had reason to know of the falsity, from fraud claims relating to the contractual representations.2

Two recent Delaware cases are particularly relevant to PE firms when selling portfolio companies. These cases show that if a buyer alleges deliberate fraud, a PE firm and its managers may not be able to deploy their usual contractual tools to limit their exposure to post-closing claims — at least not in the early stages of litigation.3

A plaintiff need only plead — not prove — fraud to survive a motion to dismiss. In the Delaware courts, this requires only that the buyer identify the alleged misstatements with particularity (what was said, when, by whom and why), and allege sufficient facts "to support a reasonable inference that the representations were knowingly false."4 Even without any direct evidence of fraud by PE defendants, buyers may be able to meet this standard by alleging, for example, that the PE defendants closely supervised a portfolio company, appointed designees to the portfolio company's board and reviewed (or were in a position to review) information that contradicted a contractual representation. And if a claim advances past the motion-to-dismiss stage, it may have significant settlement value, because defendants often have a strong incentive to avoid the costs and risks of discovery.

Fraud allegations also increase the potential for subrogation claims by R&W insurers that have made payment under their policies. Insurers' subrogation rights against sellers and their affiliates typically are limited to cases of fraud. The stronger the claim of fraud, the greater the value of the subrogation rights. R&W insurers may hesitate to pursue their subrogation rights, but once a fraud claim clears a motion to dismiss, R&W insurers are likely to have additional leverage to negotiate a subrogation settlement with the sellers and their affiliates, and thus may see a benefit in bringing subrogation claims.

Online HealthNow, Inc. v. CIP OCL Investments, LLC

In Online HealthNow (decided in August 2021),5 the Delaware Chancery Court allowed a buyer's fraud claims against a PE firm and two of its executives to advance beyond the motion-to-dismiss stage. The buyer, Online HealthNow, acquired a continuing education company called OCL. The buyer claimed that it discovered post-closing that certain "financial and accounting irregularities were not the product of mere negligence or sloppy bookkeeping, but rather resulted from Defendants' intentional misrepresentations."6 Among other claims, OCL was alleged to have intentionally misrepresented the extent to which it collected sales-and-use taxes from its customers.

In its lawsuit, the buyer brought claims against the seller and its senior executives, and also against CIP Capital, a PE fund that owned the seller; the PE firm's co-managing partner, who was said to be "the face of" the seller during the negotiations for the sale of OCL; and a vice president of the PE firm who also was allegedly "instrumental" in the negotiations.7

Neither the PE firm nor its managers signed the Stock Purchase Agreement (SPA). But the managers were part of a working group that led the sale process. The buyer alleged that the PE firm had hired a consulting firm to investigate OCL's tax practices, and that the consultant told the working group — days before the SPA was signed — that OCL had a large tax liability. But the consultant's report was not disclosed to the buyer. The buyer claimed that the seller and the PE firm had fraudulently induced it to close the deal, and that the PE firm's managers had aided and abetted the fraud.

The SPA contained a non-recourse provision stating that claims arising out of the SPA could be brought only against the parties to the agreement. If the buyer had not claimed fraud, that provision probably would have barred any claims against the PE firm and its managers.

But the court declined to dismiss the buyer's claims against the PE defendants. Instead, the court held that neither the PE firm nor its managers could use the non-recourse provision to escape the lawsuit at the motion-to-dismiss stage.8 The court reasoned that a party may not "take cover behind a non-recourse provision if it knowingly participated in the alleged contractual fraud," and it held that the buyer's allegations created a reasonable inference that the defendants knew of the alleged misrepresentations.9 The court focused on the buyer's allegations that OCL's fraud had been disclosed to the working group, and that the PE firm's managers "routinely participated in OCL's annual, monthly and special board meetings, monitored and reviewed OCL's financial performance, and routinely discussed matters relating to OCL's financial performance and related matters with [OCL's executives]."10 In other words, the PE firm's involvement in and oversight of the deal and the target company's business operations opened it up to potential exposure.

Because the court held that the buyer had adequately alleged that the PE firm and its managers participated knowingly in the fraud, the contract clauses that otherwise might have limited their liability did not bar the buyer's claims. Their motion to dismiss was denied, and the case proceeded to discovery. Soon after, the parties agreed to dismiss the lawsuit with prejudice, presumably because they settled it.11

Amerimark Interactive, LLC v. Amerimark Holdings, LLC, et al.

More recently, another Delaware court relied on Online HealthNow and allowed fraud claims against a PE firm and one of its managing directors to clear the motion-to-dismiss hurdle and proceed to discovery.12

In that case, the buyer, AmeriMark Interactive, purchased three direct mail marketing companies. The target companies generated most of their revenues from catalog sales, especially around the holidays. To capture the holiday season sales, the buyer closed the sale right before the fourth quarter of 2021. But according to the buyer, it learned after closing that one of the target companies' key vendors (a printer) had given notice before the closing that it would be invoking a contractual "force majeure" clause due to a labor shortage, resulting in "diminished circulation" of the printed catalogs over the holiday season.13

The buyer claimed it had been fraudulently induced to enter into the Equity Purchase Agreement (EPA). The buyer alleged that it would not have closed the deal — certainly not at the price paid — had it known of the labor shortage at the vendor. The buyer sued, among others, the PE firm Prudential Capital and a Prudential managing director. Prudential was the majority shareholder of the target company and played a role in the deal negotiations.

As in Online HealthNow, the EPA had a non-recourse provision, establishing that the buyer and seller were "the only entities that made any representations and warranties."14 And as in Online HealthNow, if there had been no claim of fraud, this clause probably would have barred any claims against Prudential and its managing director. But the court considered whether Delaware's "public policy against fraud should override the parties' contractual provisions as it pertains to Buyer's fraud claims against non-seller defendants."15

The court denied the PE defendants' motion to dismiss the fraud claims. The court relied on Online HealthNow and observed: "Public policy against fraud may defeat anti-reliance and non-recourse contractual language at the motion to dismiss stage in litigation, if the plaintiff can adequately plead that a non-signatory party was knowingly complicit when a contracting party made fraudulent representations in a contract."16

The allegations against Prudential and its managing director illustrate the buyer's playbook for pleading these kinds of claims. The complaint alleged that the managing director of Prudential was "the 'main driver'" of the transaction; was on the deal team working group; was at the "forefront of all negotiations"; and was, for all intents and purposes, leading the sale.17 It also alleged that the target companies' executives shared the force majeure letter with Prudential. In these allegations, the court found enough to support an inference at the motion-to-dismiss stage that Prudential and its managing director knew about the force majeure letter before closing, and that the buyer therefore had adequately pled fraudulent inducement and aiding and abetting. Thus, those claims were allowed to proceed to discovery.


All parties involved in high-value M&A deals — from the PE firms participating on the sell side to the insurers that are the primary source of recovery for the buyer's claims of breach — should note the delicate balance between freedom of contract and protection from fraud that Delaware courts try to strike. While contractual limitations on liability can narrow the post-closing litigation risks, the Delaware courts continue to show that they will not allow sellers to eliminate those risks entirely.


1. ABRY Partners V, L.P. v. F&W Acquisition LLC, 891 A.2d 1032 (Del. Ch. 2006); see also, e.g., Prairie Capital III, L.P. v. Double E Holding Corp., 132 A.3d 35 (Del. Ch. 2015).

2. Under Delaware law, contract parties may use "non-reliance" clauses to limit fraud claims based on extracontractual statements — such as oral or written communications made in the course of a negotiation. If a buyer agrees in writing "that it did not rely upon statements outside the contract's four corners, a fraud claim resting on extracontractual statements will be barred." Aveanna Healthcare, LLC v. Epic/Freedom, LLC, 2021 WL 3235739, at *13 (Del. Super. Ct. July 29, 2021) (internal quotation marks omitted).

3. A third recent case is also noteworthy. There, a PE firm was sued for fraud based on an extracontractual statement. The acquisition agreement contained both "non-recourse" and non-reliance clauses, which together ordinarily would bar claims based on extracontractual statements. Yet the court did not dismiss the claim against the PE firm, because the non-recourse provision contained a carve-out for "claims or allegations arising from or relating to fraud or intentional misrepresentation." In re P3 Health Group Holdings, LLC, 2022 WL 15035833 (Del. Ch. Oct. 28, 2022), at *7 (internal quotation marks omitted). Because the plaintiff had alleged fraud, the court held that neither the non-recourse provision (due to the carve-out) nor the non-reliance provision (due to public policy) barred the fraud claims at the motion-to-dismiss stage.

4. See Online HealthNow, Inc. v. CIP OCL Investments, LLC, 2021 WL 3557857, at *10 (Del. Ch. Aug. 12, 2021) (quoting Prairie Cap., 132 A.3d at 62).

5. Id.

6. Id. at *8.

7. Id. at *3.

8. The agreement also contained a "survival clause" that "unambiguously provide[d]" that claims based on false representations and warranties expired upon closing. Id. at *16. The court similarly held that this clause did not defeat the claims at the motion-to-dismiss stage. The court explained that "[s]ellers cannot invoke a clause in a contract allegedly procured by fraud to eviscerate a claim that the contract itself is an instrument of fraud." Id. at *18.

9. Id. at *19.

10. Id. at *10 (quotation marks omitted).

11. See Del. Ch. Case No. 2020-0654-JRS, Dkt. 58 (Joint Stipulation).

12. See AmeriMark Interactive LLC v. AmeriMark Holdings, LLC, 2022 WL 16642020 (Del. Super. Ct. Nov. 3, 2022).

13. Id. at *1.

14. Id. at *5.

15. Id.

16. Id. at *8.

17. Id. at *10.

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