In a recent case, Vigortone AG Products, Inc. v. PM AG Products, Inc., a court refused to make a finding of fraud because the purchaser’s reliance on the seller’s representations was unreasonable since the purchaser was large, sophisticated, in the same line of business as the seller, and was aware of the types of contracts customarily entered into by the seller.
PM AG Products, Inc. (“PM”), which manufactures animal nutrition products, sold its subsidiary Vigortone AG Products, Inc. (“Vigortone”) to Provimi, a large manufacturer of agricultural products, for $39.5 million. Vigortone bought young pigs and resold them to nurseries and other pig farmers with the expectation that buyers and subsequent buyers of the pigs would buy Vigortone’s swine premix. This type of promotion was common in the animal nutrition and feed business.
By the time Vigortone was sold to Provimi, Vigortone had signed seven contracts with pig farms to buy a total of three million pigs over a 10-year period at specified prices. However, Vigortone had made no contracts to sell the pigs, and thus it bore the risk of a change in the market price for pigs. The price of pigs fell after the sale to Provimi, and, consequently, Provimi claimed to have suffered $16 - $17 million in losses. Provimi filed suit against PM for fraud, claiming that PM made misrepresentations that Vigortone had offsetting sale contracts for all of the pigs purchased and that Vigortone bore no risk of price changes in the pig market.
The court noted that reliance is a requisite element in order to adequately plead a cause of action for fraud. The court found a lack of reliance in this case because Provimi had to know that there were pig purchase contracts because Provimi had been advised about the pig placement program. Further, the court pointed out that Provimi was aware that there were no offsetting sale contracts.
The court went on to emphasize that Provimi was a large company engaged in the same business as Vigortone and that Provimi knew it was going to become the owner of three million pigs. The court held that when a large, sophisticated company “closes its eyes to manifest danger, suspicion arises that it wasn’t actually fooled by the false representations of which it is complaining”; thus, Provimi was not entitled to relief.
This case demonstrates that when a purchaser of a company seeks relief against the seller of a business for alleged misrepresentations, a court will not grant relief for fraud where the purchaser is large, sophisticated, and in the same line of business as the seller. In this context, any reliance on the seller’s representations by the purchaser may be deemed to be unreasonable.