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Due Diligence Considerations in M&A Deals in Entertainment, Sports and Media Industries
For entertainment, sports and media (ESM) industries bidders ' and their counsel ' contemplating a merger-and-acquisition deal, last year's Delaware Supreme Court decision in RAA Management LLC v. Savage Sport Holdings Inc., 45 A.3d 107 (Del. 2012), highlighted the importance of assessing risk early in the due diligence process. In RAA, the bidder sought to recover its due diligence expenses, claiming that the target company knowingly included false statements in its due diligence disclosures. The state supreme court, however, affirmed the dismissal of the bidder's complaint, holding that the non-reliance and waiver clause in the parties' nondisclosure agreement (NDA) barred the bidder from recovering its expenses ' even where the disclosures were allegedly false. In doing so, the court declined to distinguish between disclosures that were inaccurate because of negligence or mistake and those that were inaccurate because of fraud.
Generally, sellers begin the due diligence process with an NDA to protect the confidentiality of information they are disclosing and to limit their liability arising from such disclosure. Bidders must evaluate this information to value the target and assess its potential business and legal risks. As was the case in RAA, NDAs typically include a non-reliance clause in which the bidder acknowledges that the seller makes no representations or warranties with respect to the information it discloses and that any representations or warranties would be made only in the definitive agreements.
RAA confirmed the enforceability of non-reliance provisions even in extreme circumstances, crystallizing the importance of a bidder's strategic due diligence plan at the outset to expose any discrepancies, misunderstandings or miscalculations as it refines its evaluation of the target. This planning is particularly crucial in entertainment, sports and media, as the bidder's in-house counsel must navigate complex industries in which the key business and legal issues are not always apparent.
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