On December 3, following a 10-day trial and extensive post-trial briefing, the Delaware Chancery Court issued a detailed, 153-page opinion in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP. The opinion is sure to be of significance to parties involved in M&A transactions under Delaware law, because Vice Chancellor Glasscock found that (i) the former CEO of Plimus, an e‑commerce payment processing company, is liable for fraud in connection with the 2011 sale of Plimus to Great Hill Partners, and (ii) defendants, including the former CEO as well as Plimus’s selling private equity investors and other shareholders of Plimus at the time of its sale, breached representations and warranties in the merger agreement.
With respect to the fraud liability, the Court found that the former CEO concealed from Great Hill a material payment-processing supplier’s repeated threats to terminate Plimus’s account––threats that the supplier communicated to Plimus after the parties had signed the merger agreement but before closing of the transaction. According to the Court, the former CEO “intended for Great Hill to rely on [the] false representations in order to induce Great Hill to proceed with the transaction,” and Great Hill’s reliance on those false representations in turn was reasonable because “Great Hill could not have discovered these termination threats through pre-signing diligence.” The Court also held that the former CEO and selling private equity investors made other knowing misrepresentations to Great Hill during the diligence process (about the facts surrounding another supplier’s previous termination of Plimus), but the Court found that those knowing misrepresentations fell short of fraud because they were not material in the context of the broader transaction.
With respect to the indemnification liability, the Court found breaches of the merger agreement’s representations and warranties that Plimus had complied with operating rules of the major credit card associations and that no payment-processing supplier had notified Plimus that it intended to terminate its business relationship. As a result, the Court concluded that Great Hill is entitled to indemnification up to the sellers’ pro rata share of the escrow amount provided for in the merger agreement. The Court also held that, even though there was fraud in the transaction and the merger agreement limited the sellers’ indemnification obligations “except . . . in the case of fraud or intentional misrepresentation (for which no limitations set forth herein shall be applicable),” the limitation on liability protected the selling stockholders – who themselves were not liable for fraud – from indemnification beyond the escrow. Finally, the Court deferred judgment on potential unjust-enrichment damages against all defendants who received merger proceeds until the parties address damages in future briefing.
Great Hill is represented in this matter by Goodwin Procter LLP and Richards, Layton & Finger, PA.