The Delaware Supreme Court recently issued an important decision in LGM Holdings, LLC v. Gideon Schurder, et al. that provides much-needed clarity on when fraudulent concealment can toll the statute of limitations for post-closing indemnification claims in M&A transactions.
Fraudulent Concealment Defined
Fraudulent concealment is the act of intentionally hiding or suppressing a material fact that one has a duty to disclose, with the intent to deceive another party.
This concealment can lead to legal action when the undisclosed information would have influenced the other party’s decision-making.
In short, fraudulent concealment is a form of fraud where silence or non-disclosure – rather than an outright lie – misleads the other party.
Case Background
The dispute in LGM Holdings arose from an acquisition where the buyers discovered evidence of wrongdoing after closing, triggered by investigations from both the FDA and the U.S. Department of Justice.
The sellers had allegedly made intentional breaches of representations and warranties in the acquisition agreement while fraudulently concealing material facts.
A subsequent letter agreement between the parties imposed caps on indemnification, but only for certain claims related to the government investigation.
Key Legal Principles
The Delaware Supreme Court established several crucial principles for commercial litigators.
First, the court clarified that fraudulent concealment can “stop the clock” on statute of limitations periods when a defendant has fraudulently concealed facts necessary to put the plaintiff on notice of the truth.
However, this requires proof of “an affirmative act of actual artifice” by the defendant that either prevented the plaintiff from being aware of material facts or actively led them away from the truth.
Significantly, the court held that partial disclosure of facts in a misleading or incomplete way can constitute the requisite actual artifice.
This ruling expands the potential scope of fraudulent concealment claims beyond cases involving complete silence.
Practical Implications
For M&A practitioners, this decision reinforces the importance of complete and accurate disclosure during deal negotiations. Sellers cannot rely on partial or misleading disclosures to avoid later claims of fraudulent concealment.
The ruling also clarifies that the statute of limitations begins running when the plaintiff has “inquiry notice” – when they are objectively aware of facts giving rise to the potential claim.
The decision provides valuable guidance for structuring indemnification provisions and managing post-closing disputes, particularly when government investigations or regulatory issues emerge after deal completion.
Read the full opinion: LGM Holdings, LLC v. Gideon Schurder, et al.
