Abry Partners v. L.P. v. F&W Acquisition LLC

891 A.2d 1032 (2006)

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Nature of the Case

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Facts

D announced publicly that it would sell a Company through an auction conducted by Credit Suisse First Boston ('CSFB'). One of the potential buyers contacted by CSFB was P, the eventual Buyer. P expressed to D and CSFB that its offer would be based largely on the Company's free cash flow, as measured by its earnings before interest, taxes, depreciation, and amortization ('EBITDA'). P was willing to pay ten times EBITDA for the twelve months ending June 30, 2005, which would result in a price of approximately $480 million. Negotiations resulted in P agreeing to purchase all the stock of the Company for $500 million through a Stock Purchase Agreement. P assumed ownership of the Company and discovered a host of serious financial and operational problems. P came to the conclusion that it had been defrauded by D and the Company in connection with the Stock Purchase Agreement. P claimed that D and Company management, working in concert, schemed together to manipulate the Company's financial statements in order to fraudulently induce P into purchasing the Company at an excessive price. The Company's financial statements contained material misrepresentations and did not accurately portray financial conditions. P argues that D misstated its performance by using outdated estimates rather than actual numbers to reflect newsstand revenue, failing to account for book returns correctly, and establishing inadequate reserves for obsolete inventory and uncollectible accounts receivable. P also argues that the Company misrepresented the implementation status of a book order fulfillment system, which was named VISTA. P alleges that the true value of the Company was more like $400 million than $500 million and that it would never have closed had it known that the Company was propping up its performance with unethical business and accounting practices. P asserts a fraudulent inducement claim and seeks rescission of the Stock Purchase Agreement and related relief. Both P and D are private equity firms. In the SPA, P promised that neither the Company nor the D had made any representation or warranty as to the accuracy of any information about the Company except as set forth in the Agreement itself and that neither D nor the Company would have any liability to P or any other person for any extra-contractual information made available to P in connection with the contemplated sale of the Company. The Agreement makes it clear that D was not making the much more extensive representations made by the Company in the much longer part of the Agreement setting forth the Company's representations and warranties. The contract's plain terms would most logically be read to preclude any suit by P against D for all representations and warranties made by the Company. The agreement also limits the aggregate liability of D for conduct covered by § 9.1(a) to the amount of the escrowed Indemnity Fund, which was established to be $20 million in § 2.4(b). The Agreement also addresses the exclusivity of the Indemnity Claim provisions of the Agreement. The Agreement clearly states that 'the provisions of Article IX were specifically bargained for and reflected in the amounts payable to the Selling Stockholder in connection with the Sale pursuant to Article II.' P seeks an order requiring the D to take back the Company and return the $500 million largely on the basis that the Company made false representations and warranties and D provided a false Officer's Certificate, thereby fraudulently inducing P to sign the Agreement and later close the deal.