Private investment transactions between sophisticated parties often include a negotiated agreement, sometimes called a “big boy letter,” in which the buyer acknowledges that it has made its own independent assessment of the risks involved, including that the seller or other counterparty may possess material, non-public information regarding the issuer which has not been disclosed to the buyer. Big boy letters typically contain a non-reliance provision in which the buyer represents that it has made its investment decision based on its own knowledge and investigation without regard to anything the seller has said or not said (or only relied on specific representations contained in the parties’ definitive agreement). A non-reliance provision that is not boilerplate, but instead the product of negotiation between sophisticated parties dealing at arm’s-length, may negate allegations of reasonable reliance on any extra-contractual representations.
The effect of non-reliance provisions on buyer claims alleging extra-contractual representations, however, has varied. The main line of division in the cases is whether a non-reliance provision may render reliance on extra-contractual representations unreasonable as a matter of law, or is only evidence relevant to reliance. A recent Ohio federal court decision in In re National Century Fin. Enterp. Inv. Litig.,1 granting post-discovery summary judgment dismissing state law fraud and negligent misrepresentation claims asserted against a placement agent in a private securities offering, gives strong support to big boy letters as an enforceable mechanism to allocate risk by delineating the scope and content of contractual representations and bar claims predicated on extra-contractual representations.
Reception in the Courts and at the SEC
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