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Choosing the Appropriate Standard of Review with Mergers Between a Controlling Stockholder and its Subsidiary: The Business Judgement Rule v. Entire Fairness Standard
Reliance Disclaimers in M&A Agreements
Buying or selling a closely held business (“M&A), including the purchase of a division or a subsidiary, can be structured as (i) a statutory combination such as a statutory merger or share exchange, (ii) a negotiated purchase of outstanding stock from existing shareholders or (iii) a purchase of assets from the business.1 An M&A transaction typically revolves around an agreement between the buyer and the selling entity, and sometimes its owners, setting forth the terms of the deal, which is herein referred to as the “Agreement” whether it takes the form of a merger agreement, stock purchase agreement or asset purchase agreement. An M&A Agreement typically includes contractual representations and warranties as to the assets and liabilities of the business to be acquired, conditions to the buyer’s obligations to close the transaction contemplated thereby, the obligations of the seller and its owners to indemnify the buyer for breaches of its representations and covenants therein (and any contractual limitations on the amount that buyer can recover for such breaches), and that the Agreement represents the entire agreement of the parties with respect to the transaction. After the transaction is closed, the buyer may determine that there were breaches of seller’s representations and covenants, and that buyer’s losses could exceed the amount that buyer could recover under the express indemnification provisions in the Agreement. Under these circumstances, the buyer might claim that is was defrauded by the seller, that its damages for its fraud claim were not capped by the Agreement, and that it is entitled to rescind the transactions and recover the amount that it paid for the business. Whether the buyer is entitled to recover the amount it seeks depends on the wording of the Agreement and the law governing its rights under the Agreement.