Agspring v. NGP (July 30, 2020) involved the sale of a portfolio company, Agspring LLC, by one PE fund (the “Seller”) to another (the “Buyer”). At the pleading stage of litigation, the Delaware Court of Chancery found it reasonably conceivable that: (i) the Agspring officers deliberately concealed from the Buyer a steep decline in earnings that occurred before and after the signing and closing; and (ii) as a result of the decline, certain of the representations and warranties in the sale agreement and a related financing agreement were false when made. The court concluded that not only the Agspring officers but also the Seller may have known or been in a position to know that the representations were false when made; and that therefore they faced potential liability for fraud.
Key Points. The decision serves as a reminder that:
- A PE-seller may have liability for its portfolio company’s fraudulent representations. When a PE fund sells a portfolio company, the fund can be liable for fraudulent representations made in the sale (or a related) agreement–even if the fund is not a party to the agreement.
- A decline in earnings may implicate the accuracy of representations. A steep decline in earnings can support a reasonable inference that certain representations in a sale agreement (or related agreements) may have been false when made. In this case, at the pleading stage, the court found it reasonably conceivable that Agspring’s officers and the Seller were in a position to know that the steep decline in its earnings that began just before the sale agreement was signed may have (i) constituted a Material Adverse Effect and (ii) put the company on a course that would lead to a default under a Material Contract that occurred three years later.
