Online HealthNow, Inc., et al: Anti-fraud provisions can be “too much dynamite”

Quarterly Corporate / M&A Decisions update series

The Delaware Court of Chancery in Online HealthNow, Inc., et al. v. CIP OCL Investments, LLC, et al., C.A. No. 2020-0654-JRS (Del. Ch. August 12, 2021) extended a recent line of cases declining to enforce seller-friendly provisions limiting claims by buyers for fraudulent misrepresentations within the contract. The court likened the “remarkably robust” seller protections in the agreement at issue to “too much dynamite” and found that the provisions were ineffective in barring claims for fraud within the contract itself because a party “cannot invoke a clause in a contract allegedly procured by fraud to eviscerate a claim that the contract itself is an instrument of fraud.”

In the fall of 2018, Online HealthNow, Inc. and Bertelsmann, Inc. (the Buyer) agreed to purchase OCL Holdings (OCL) and its related subsidiaries from CIP OCL Investments, LLP (the Seller). OCL sells continuing education programs to adults, mainly located in the United States. As part of the purchase, the Seller represented that OCL did not have any undisclosed liabilities. However, at the time of the sale, OCL owed an estimated US$8-9 million in unpaid sales and use taxes. According to the Buyer, the Seller knew of this liability and actively hid it from the Buyer, including by making representations in the purchase agreement that the Seller knew were false at the time the agreement was signed.

The Buyer brought suit after learning of the undisclosed tax liability. The Seller moved to dismiss, arguing, among other things, that all representations and warranties under the purchase agreement expired at closing, and further arguing that the agreement limited the parties who could be named in a suit relating to the transaction. 

The court denied the motion in its entirety, holding that the Seller could not invoke protections in a contract it was accused of procuring through fraud to block claims asserting that fraud. The court reiterated the importance of ABRY Partners V, L.P. v. F & W Acquisition LLC, which held that sellers could not rely on an anti-reliance provision in a purchase agreement to defeat claims alleging fraudulent misrepresentations within that same purchase agreement.

The court also rejected the Seller’s argument that the purchase agreement barred fraud claims by causing all contractual representations and warranties to expire at closing. The court called into doubt the Superior Court’s decision in Sterling Network Exchange LLC v. Digital Phoenix Van Buren LLC, which held that parties could limit the time period in which claims could be asserted so long as the limitations were “reasonable,” and found that that under the facts alleged, the restrictions at issue were neither reasonable nor enforceable.

The court also found that the contractual provisions prohibiting fraud claims against certain parties were also unenforceable if those parties were complicit in defrauding the Buyer into entering into the agreement that contained those protections.

 

Authored by Ryan M. Philp, David R. Michaeli, and Sam Dougherty.

Contacts
Ryan Philp
Partner
New York
David Michaeli
Counsel
New York
Allison Wuertz
Senior Associate
New York
Jon Talotta
Global Co-Lead
Northern Virginia
Michael Hefter
Partner
New York
William Regan
Partner
New York

 

This website is operated by Hogan Lovells Solutions Limited, whose registered office is at 21 Holborn Viaduct, London, United Kingdom, EC1A 2DY. Hogan Lovells Solutions Limited is a wholly-owned subsidiary of Hogan Lovells International LLP but is not itself a law firm. For further details of Hogan Lovells Solutions Limited and the international legal practice that comprises Hogan Lovells International LLP, Hogan Lovells US LLP and their affiliated businesses ("Hogan Lovells"), please see our Legal Notices page. © 2022 Hogan Lovells.

Attorney advertising. Prior results do not guarantee a similar outcome.