The Annual Survey Working Group reports annually on the decisions we believe are the most significant to private equity and venture capital practitioners.1 The decisions selected for this year’s Annual Survey are the following:
1. Prairie Capital III, L.P. v. Double E Holding Corp. (liability of fund sponsors for portfolio company fraud)
2. In re Molycorp, Inc. Shareholders Litigation (fiduciary duties in the context of the exercise of demand registration rights)
3. Halpin v. Riverstone National, Inc. (drag-along rights and waivers of appraisal rights)
4. TCV VI, L.P. v. TradingScreen, Inc. (funds available for redemption of preferred stock)
5. SIGA Technologies, Inc. v. PharmAthene, Inc. (expectation damages as a remedy for breach of an express contractual obligation to negotiate a definitive agreement in good faith)
6. Fox v. CDX Holdings, Inc. (treatment of stock options in a merger)
1. PRAIRIE CAPITAL III, LP V. DOUBLE E HOLDING CORP. (LIABILITY OF FUND SPONSORS FOR PORTFOLIO COMPANY FRAUD)
In this case,2 the Delaware Court of Chancery dismissed several of a purchaser’s fraud-related counterclaims against a portfolio company seller based on the exclusive representations and integration clauses contained in the parties’ stock purchase agreement. In refusing to look beyond the “four corners” of the stock purchase agreement, the court found that the purchaser clearly disclaimed reliance on the seller’s extra-contractual misrepresentations.3 However, the court rejected the seller’s motion to dismiss other fraud-based claims arising from representations made expressly within the stock purchase agreement.4 The court also held that the purchaser’s fraud claims against certain of the officers and directors of the portfolio company and its private equity sponsors survived the purchaser’s motion to dismiss under aiding and abetting and conspiracy theories of liability.5 According to the court, the purchaser’s allegations created an inference that such defendants either provided substantial assistance to, or acted in concert with, those making the stock purchase agreement’s fraudulent misrepresentations.6 This decision has far-reaching implications: not only does it expose the fund sponsors of portfolio companies to potential liability for fraud claims in connection with a sale of the portfolio company based on the portfolio company’s contractual representations and warranties, but it also expands the ability of these firms to shield themselves against extra-contractual fraud claims.
Before its acquisition by Incline Equity Partners (“Incline”), Double E Parent LLC (“Double E”) was a Delaware limited liability company controlled by Prairie Capital III, L.P. and Prairie Capital III QP, L.P. (the “Prairie Funds”) and their affiliates.7 The Prairie Funds were private equity funds sponsored by Prairie Capital Partners (“Prairie Capital”) and managed by Daniels & King Capital III, LLC (“Daniels & King”).8 <...