The shifting of risk from one party to another is an important aspect of any merger and acquisition transaction as M&A transactions are often quick moving and sellers may not be completely forthcoming about the risks associated with the target company or assets being sold in the M&A transaction. Thus, the buyer will seek to include provisions in the definitive agreements to shift some of the risk associated with the transaction from the buyer to the seller. Common deal mechanisms used to shift the risk in the definitive M&A documents include indemnification, waiver and release provisions.
Under Texas law, as established in cases such as Medical Imaging Solutions Group, Inc. of Texas v. Westlake Surgical, LP, waiver is the intentional relinquishment of a known right or intentional conduct inconsistent with claiming the right. A release, according to Ramirez v. 24 Hour Fitness USA, Inc., is a contract in which one party assumes the liability inherent in a situation and agrees to hold the other party without responsibility for any damages or liabilities arising out of the transaction at issue. Texas courts have explained that risk-shifting clauses, such as a waiver or release, must comply with the following in order to be enforced, as Ramirez states:
To be enforceable under Texas law a release must comply with two fair notice requirements: the express negligence doctrine and the conspicuousness requirement. The express negligence doctrine requires that the intent of the parties “be specifically stated in the four corners of the contract.” To satisfy the conspicuousness requirement “something must appear on the face of the contract to attract the attention of a reasonable person when he looks at it. Language may satisfy the conspicuousness requirement by appearing in larger type, contrasting colors, or otherwise calling attention to itself.” Whether the release satisfies the fair notice requirements is a question of law for the court.
The express negligence doctrine is a legal doctrine imposed by Texas courts in cases such as Ethyl Corp. v. Daniel Constr. Co. The doctrine states that an indemnification agreement is not enforceable to indemnify a party from the consequences of its own negligence or other misconduct unless such intent is specifically stated within the four corners of the agreement. In addition to requiring the exculpatory provision be explicit, according to Dresser Indus., Inc. v. Page Petroleum, Inc., Texas courts require that the provision be conspicuous to attract the attention of a reasonable person when he or she looks at it.
Dresser also states that whether an agreement is compliant with both the express negligence doctrine and the conspicuousness requirement is a question of law for the court. In cases such as Storage & Processors, Inc. v. Reyes, Texas courts have held that if an agreement does not satisfy either of the fair notice requirements, then the agreement is unenforceable as a matter of law. However, a court may deem the agreement to be enforceable even if both of the fair notice requirements are not met when all contracting parties have actual knowledge of the plan’s terms.
In Dresser the Texas Supreme Court extended the fair notice requirements of express negligence and conspicuousness to apply to releases and waivers of liability due to the underlying policy concerns focusing on the extreme shifting of risk as follows:
[W]e can discern no reason to fail to afford the fair notice protections to a party entering into a release when the protections have been held to apply to indemnity agreements and both have the same effect. The policy considerations underlying the enforcement of indemnity clauses to warrant the application of the fair notice requirements to releases as well. This is especially true because of the difficulty often inherent in distinguishing between these two similar provisions. Therefore, we hold that fair notice requirements of conspicuousness and the express negligence doctrine apply to both indemnity agreements and to releases. …
Texas courts have also held that in order to release or waive fraudulent inducement claims, the language of the release or waiver provision must specifically enumerate the claims intended to be released or waived due to the inherent risk-shifting at issue in cases such as O’Connor v. Cory and Allen v. Devon Energy Holdings, L.L.C. F/K/A Chief Holdings, L.L.C. and Trevor Rees-Jones. In Allen the Texas Court of Appeals held that a disclaimer of reliance provision is unenforceable for claims which allege fraudulent inducement, unless fraudulent inducement is specifically disclaimed by the disclaimer of reliance provision at issue as follows:
While the determination of whether a particular contract is sufficiently clear to disclaim reliance hinges on each contracts chosen words and structure, a “pure merger clause” is not sufficient. …
The “Independent Investigation” clause does not contain the kind of absolute and all-encompassing language that satisfies the clarity requirement as to any fraudulent inducement claim. …
The clarity requirement is a threshold hurdle that must be passed for a disclaimer to be enforceable; when the disclaimer lacks a clear and unequivocal expression of intent to disclaim reliance, it will not preclude a fraudulent inducement claim regardless of the circumstance surrounding the agreement. Because we have concluded that the redemption agreement does not clearly and unequivocally disclaim reliance … the redemption agreement does not bar Allen’s fraudulent inducement claim with respect to those statements as a matter of law.
In O’Connor v. Cory, Judge Boyle ruled that a disclaimer of reliance provision in a purchase agreement is not an absolute bar to a potential federal securities claim under the same agreement, and, instead, ruled that the disclaimer of reliance provision is but one factor that the court will consider in determining if a plaintiff’s reliance was reasonable.
In conclusion, indemnification provisions, waivers and releases which are intended to shift certain risks associated with an M&A transaction from one party to another are subject to strict requirements of the express negligence doctrine and must be clear and conspicuousness due to underlying policy concerns. In order to best comply with these requirements, the applicable indemnification provision, waiver or release should appear in bold-faced italics and expressly state the intended items to be indemnified, waived or released under the agreement.
For related content, please consider attending the “19th Annual Choice, Governance & Acquisition of Entities” course to be presented May 21 through a virtual webcast format. The course is co-sponsored by Texas Bar CLE and the Business Law Section of the State Bar of Texas. The webcast will replay June 25 and July 23. The Texas Lawbook is a media sponsor of the course.