Secondary buyout of private equity portfolio company

• Publisher of special interest magazines

• e.g., Popular Woodworking, Scuba Diving

• Sold by Providence Equity Partners
• Bought by ABRY Partners

Stock purchase agreement

• Target gave standard representations

• Re: business, operations and financial statements

• Seller gave only limited representations

• E.g., owned stock being sold
• Gave officer's certificate re: accuracy of Company and Seller representations and absence of MAE

• Buyer agreed to a non-reliance provision

• Acknowledged that it was solely relying on
  contractual representations
• That there would be no liability for the Buyer's
  use or reliance on any other information

• Buyer agreed to indemnification as its sole remedy

• Capped at 4% of purchase price
• $20 million on a $500 million deal

Buyer alleged financials were false

• Including that practices were used to inflate revenue
• Including that Seller (not just Target) was complicit

Buyer sought rescission

• Notwithstanding express terms of agreement

Court held:

• Buyer could seek rescission for claims based on
  intentional fraud by seller
• But dismissed buyer's claim for rescission based on
  negligent misrepresentation

• Compare use of Exchange Act §29(a) in context of
  Big Boy Letters

Court also upheld contractual choice of Delaware law

• Applied to tort claims as well as contractual claims
• Parties were all Delaware entities

• Although parties and Target were all based in
  different states

Settled by parties

• News item 5.25.06
• Reported that Providence Equity will make an unspecified payment to F&W in exchange for a minority stake

Opinion - Strine

Delaware Website PDF

Hyperlinked outline

Background +

Facts I

• Pre-agreement status I.A
• Seller and Company before the sale I.B
• Buyer discovers financials were inaccurate I.C

Buyer's Claims II

• Relevant terms of the SPA II.A

• SPA: stock purchase agreement
• Procedural Framework II.B

Analysis III

• Fraudulent inducement - Choice of law III.A
• Buyer's fraud claim III.B
• Does the SPA bar rescission? III.C

• For intentional, fraudulent misrepresentations? III.C.1
• Despite terms of the SPA? III.C.2

Conclusion IV

Law firm mailings

• Willkie Farr 2.16.06
• Wachtell Lipton  2.17.06
• Goodwin Procter  3.14.06
• Weil Gotshal  March 2006

Representations & Warranties

Big Boy Letters