M&A and Breach of Contract Claims

A recent case from the Delaware Court of Chancery, ENI Holdings, LLC v. KBR Group Holdings, LLC, C.A. No. 8075-VCG (Del. Ch. Nov. 27, 2013), has increased the focus on the statute of limitations for breach-of-contract claims in the M&A context. In particular, the Chancery Court found that the "ordinarily applicable statute of limitations governs the time period in which actions for breach can be brought," even if the survival period is indefinite pursuant to the terms of a purchase agreement. The court also determined that a statute of limitations period may be shortened but not extended pursuant to a contract. As the statute of limitations period for breach-of-contract claims is only three years under Delaware law, it is likely that many acquirers have much shorter periods within which they may make indemnity claims than they expected when they entered into purchase agreements.

If parties desire to make indemnification claims available for more than three years after closing, there are two available alternatives. First, the parties could enter into a contract under seal, a vestige of English common law that is enjoying a renaissance because it has a 20-year statute of limitations under Delaware law. Second, the parties could change the governing law to another jurisdiction that has a longer statute of limitations period for breach-of-contract claims.

Contracts Under Seal

Contracts under seal, are also known as "specialty contracts" or "sealed instruments," are relatively easy to form under Delaware law. The parties should add the corporate seal or the word "Seal" under the signature block or next to the signature line. Reference to the contract under seal should also be made in the recitals. A provision acknowledging that the parties intend to enter into a contract under seal with a longer statute of limitations period as well as a reference to the contract under seal in the testimonium clause would further strengthen the case for the establishment of a contract under seal. If a contract under seal under Delaware law is desired, the parties should also ensure that Delaware law governs the agreement.

Other Jurisdictions

Another alternative is to select a jurisdiction with a longer statute of limitations period for breach-of-contract claims. New York, whose law is commonly used as the governing law in agreements, has a six-year statute of limitations for breach-of-contract claims and, like many other jurisdictions, does not allow the statute of limitations to be extended by contract. In jurisdictions in which Faegre Baker Daniels has an office, the statute of limitations for breach of contract claims ranges from three years in Colorado to 10 years in Illinois and Iowa, with California (four years), Indiana (six years) and Minnesota (six years) falling within that range. Several of these jurisdictions allow the statute of limitations to be extended or waived by contract, including California, Iowa and Minnesota, whereas certain other states do not.

Conclusion

Parties that enter into purchase agreements governed by Delaware law should be aware that unless they enter into a contract under seal, the statute of limitations period for indemnification claims will be limited to three years. If a longer period is desired, parties should either enter into a contract under seal or choose to have the laws of another jurisdiction govern their agreement.