A New Delaware Statute of Limitations Will Be Useful for M&A
Delaware has furthered its general policy of giving maximum effect to the principle of freedom of contract and to the enforceability of contracts in accordance with their terms by passing legislation that authorizes a statute of limitations of up to 20 years for breach of contract claims. Delaware is the first state to adopt a statute of limitations of this length for breach of contract claims.
The legislation, which amended Section 8106 of Title 10 of the Delaware Code, was effective on Aug. 1, 2014, and enables parties to a written contract involving at least $100,000 to provide that any action based on such a contract may be brought within a period specified therein up to 20 years from the accrual of the cause of action. The synopsis to the legislation makes clear that the “period” specified may include (1) a specific period of time, (2) a period of time defined by reference to the occurrence of some other event or action, another document or agreement or another statutory period and (3) an indefinite period of time.
The legislation should prove useful in a variety of contractual circumstances, but it is particularly significant for private merger and acquisition transactions where parties frequently provide for representation and warranty survival periods in excess of the applicable breach of contract statute of limitations.
For example, in a typical asset purchase or merger agreement involving the acquisition of a private company, the so-called “fundamental representations” (e.g., those relating to the existence of the parties, authorization of the transactions and title to the assets) are often stated to survive indefinitely; tax representations are typically drafted to survive for the applicable statute of limitations under the tax laws; and environmental representations and warranties can last for extended periods, often longer than the typical contract statute of limitations. The relationship between the survival period of a representation or warranty and the application of the statute of limitations is not always fully appreciated.
However, because a cause of action for breach of a representation or warranty not involving a third-party claim generally arises at closing, any such claim, including a claim styled as an indemnification claim, would, absent a basis for tolling, need to be brought within the applicable statute of limitations, irrespective of a longer survival period for any given representation or warranty, which has been held to be an impermissible attempt to extend the statute of limitations by contract. Now that this period is up to 20 years, rather than three or four years as under prior law, the parties’ bargained-for terms will be given much greater effect under the scenarios described above.
Prior to the adoption of this legislation, parties to private merger and acquisition transactions had tried to address the concern of representation and warranty periods extending beyond the applicable statute of limitations by treating the acquisition agreement as a contract under seal. Under Delaware law, contracts under seal have the equivalent of a 20-year statute of limitations period.
However, in addition to the issue of technically complying with the requirements for a contract under seal, it is not completely clear under Delaware law that the 20-year period for a contract under seal may be shortened by the parties. The new legislation makes clear that the parties have complete flexibility in this regard.
In addition to providing for the application of Delaware law to their contracts, including a specific reference to the Delaware statute of limitations, parties may wish to provide for jurisdiction in Delaware, since a statute of limitations can sometimes be treated as procedural so that the statute of limitations of the forum may apply rather than the statute of limitations of the law governing the contract.
The issue of representations such as those discussed above potentially being unenforceable in the context of private acquisition and merger transactions by exceeding the applicable statute of limitations has received considerable attention from the Delaware bar. It recently has also been an issue of concern in the national bar and was discussed this year by the Mergers and Acquisitions Committee of the Business Law Section of the American Bar Association, all of which ultimately prompted Delaware to take action to address the issue.
The Commercial Law Section of the Delaware State Bar Association (DSBA), with input from members of other sections, such as the Corporation Law Section, sponsored this legislation. It was then approved by the executive committee of the DSBA and was introduced as a House bill to the Delaware Legislature.
After the House and the Senate approved the bill, the governor of the state of Delaware signed it on July 22, 2014, and, as noted above, it was effective on Aug. 1, 2014. Although the legislation does not specifically indicate whether it would apply to contracts entered into prior to Aug. 1, 2014, case law discussing amendments to statutes of limitations as “remedial” and not affecting “substantive or vested rights,” particularly where a statute of limitations is not shortened so as to cut off a plaintiff’s right to bring suit, suggests that this legislation should apply to contracts entered into prior to its effective date.
This would also appear to be the equitable result as it would be consistent with Delaware’s policy to give maximum effect to the enforceability of contracts in accordance with their terms by giving effect to the limitations period negotiated by parties as specified in their contract.
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Louis G. Hering, R. Jason Russell, “A New Delaware Statute of Limitations Will Be Useful for M&A,” Law360 (August 5, 2014)
Originally printed in Law360 (www.law360.com). These materials have been prepared solely for informational and educational purposes, do not create an attorney-client relationship with the author(s) or Morris, Nichols, Arsht & Tunnell LLP, and should not be used as a substitute for legal counseling in specific situations. These materials reflect only the personal views of the author(s) and are not necessarily the views of Morris, Nichols, Arsht & Tunnell LLP or its clients.