Delaware Court Opinion Highlights Importance of Clear Integration and Non-Reliance Provisions in M&A Agreements

An article from the Sidley law firm explains that the recent opinion from the Delaware Court of Chancery in Cytotheryx, Inc. v. Castle Creek Biosciences, Inc. “is a reminder for practitioners to carefully consider whether an integration clause in a purchase agreement will be sufficient to bar extra-contractual misrepresentation claims.”

It also notes that although fraud claims arising from M&A transactions are most often brought against sellers, this decision shows how those claims can also be brought against purchasers.

 The case involved Cytotheryx, the seller, which entered into a merger agreement with Castle Creek, the buyer, and its private equity sponsor, Paragon Biosciences. As part of the merger consideration, Cytotheryx received a combination of cash and preferred stock.

The merger agreement contained an integration clause but lacked a non-reliance clause. When Cytotheryx later demanded the redemption of its preferred stock, Castle Creek refused, citing restrictions in an existing loan agreement.

Cytotheryx sued, alleging fraud and promissory estoppel, claiming that Castle Creek’s COO had made false statements during negotiations about the redemption’s viability.

The Delaware court ruled in favor of Cytotheryx, denying Castle Creek’s motion to dismiss the fraud claim. The court found that the integration clause was insufficient to bar the fraud claim because the merger agreement’s terms did not contradict the COO’s statement regarding lender approval.

The court also noted that the merger agreement did not contain a non-reliance clause, which would have explicitly disclaimed reliance on extra-contractual statements. The court emphasized that such clauses are enforceable under Delaware law if they are clear and unambiguous, and their absence allowed the fraud claim to proceed

“The Cytotheryx case illustrates the potential for wide-ranging interpretations of casual remarks inevitably made during negotiations,” the writers conclude. “A disclaimer of reliance on extra-contractual statements can limit the effect of those remarks, and in this case, such a provision may well have prevented this litigation.”