Gutterball Claims: Delaware Court Rejects Contract and Fraud Claims in the Face of Fair Disclosures
In a recent post-trial opinion in BBP Holdco, Inc. v. Brunswick Corporation, the Delaware Superior Court addressed an unusual M&A dispute. After a spin-off of one of Brunswick’s bowling divisions, the buyers claimed that they had been defrauded not because Brunswick failed to disclose an ongoing regulatory issue, but because Brunswick allegedly failed to disclose enough about the issue, including how it might unfold in the future. The court soundly rejected this theory, holding that Brunswick fulfilled its obligation to fairly disclose the issue in sufficient detail for the buyers to perform their own independent investigation.
This case arose out of the sale of Brunswick’s bowling products division, called BBP, to private equity buyers. At the time of the sale, BBP was engaged in discussions with a Swedish regulatory agency relating to the compliance of bowling pinsetters installed in Sweden, and elsewhere across the European Union. Although the Swedish regulatory agency had sent notices to BBP that its pinsetters might not comply with safety regulations, BBP continued to ship its pinsetters to Sweden, with modifications to comply with requirements imposed by Swedish inspectors. BBP’s Swedish distributor stated that the inquiry would be “closed” if BBP continued to deliver the product in that condition, and BBP’s Swedish counsel advised that BBP could ship compliant machines into Sweden. Internal communications showed that Brunswick believed the inquiry was likely to be resolved favorably.
The European regulatory inquiry was described in one of the disclosures provided to the buyers early in the sale process, and the parties also discussed the status of the inquiry on multiple diligence calls. The buyers opted not to retain subject matter experts or to perform independent research on the European regulations identified in the disclosure. The parties closed the deal in May 2015.
Months after the sale closed, the Swedish regulatory authority requested that BBP apply modifications to all pinsetters already installed in the country, in addition to new products being sold going forward. At that point, the regulatory inquiry escalated to the European Commission and European courts, with the potential to impact BBP’s pinsetters sold to and installed in other European countries.
The plaintiffs (the post-sale operating companies and the holding company that purchased BBP) alleged that Brunswick breached certain contractual representations and fraudulently concealed the severity of the regulatory issue. They demanded indemnification from Brunswick for the cost of applying modifications to all pinsetters installed across the European Union. Following a three-week trial, the court held that plaintiffs failed to prove any of their claims.
The court first concluded that plaintiffs had not proven that Brunswick engaged in any non-contractual fraud, as it was neither silent in the face of a duty to speak nor deliberate in concealing any material facts about the regulatory issue. In the context of this arms’-length transaction between sophisticated parties, a seller does not have an obligation to “give every single detail about a certain matter.” Instead, “[a] partial disclosure is permissible so long as it is considered ‘fair,’” in that it “disclose[s] facts that are enough to allow th[e] listener to pursue its own additional investigation.” The court determined that Brunswick disclosed sufficient information for a sophisticated counterparty to investigate further on its own — especially given the low “degree of import” the issue appeared to merit at the time — but the buyers “consciously and deliberately chose not to further investigate.” In addition, the court found that Brunswick did not deliberately conceal any material facts because it “disclosed the pinsetter issue and its honest belief that the issue was not a material concern.”
The court next turned to the plaintiffs’ claims for contractual fraud and breach of contract, and held that Brunswick had not made any contractual misrepresentations, much less intentionally so. As to each of Brunswick’s contractual representations that the plaintiffs claimed was untrue, the court determined that the disclosure Brunswick provided early in the sale process (which was embedded in the disclosure schedules to the purchase agreement) operated as an “exception” that carved out the European regulatory inquiries from those representations. Notably, the court explained that a disclosure need not be explicitly cross-referenced in each specific representation to apply, so long as the contract contains a savings clause that provides that terms apply “cross-sectionally” where their relevance is reasonably apparent, as the sale agreement did in this case.
The court ended with the following assessment of the case: “[The plaintiffs’] claims now hyperfixate on a particular issue in this deal that—for good reason given Brunswick’s prior experience and [the buyers’] then-shifting focus on other aspects of the sale—seemed of little moment to either party at the time but—to all parties’ surprise and dismay—simply went unexpectedly (and expensively) sideways.” Concluding that the plaintiffs failed to prove Brunswick was liable on any of the claims, the court soundly rejected this hindsight-infected view of the transaction.
The Delaware Superior Court’s opinion provides helpful guidance to parties on both sides of a transaction. Sellers can take some comfort in the court’s holding that they need not disclose every detail and potential twist and turn about an issue, so long as they make a “fair” disclosure that provides sufficient information for buyers to conduct their own independent investigation. The “duty to speak” is not endless. Buyers should be reminded that they have an obligation to investigate all disclosed issues to their own satisfaction; they will not be permitted to cry fraud when they could have discovered additional detail on their own from the facts provided, but chose not to take even basic steps to do so.
Sidley represented Brunswick Corporation in this matter. The Sidley team was led by Nilofer Umar, and included Kendra L. Stead, Heather Benzmiller Sultanian, Abigail Bachrach, and William J. Lawrence (all in Chicago).
This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.
