Sandbagging Issues in M&A: Pro- and Anti-Sandbagging Provisions, Applying State Law

Description

The practice of sandbagging has become common in M&A. Deal counsel have three options they can pursue in acquisition agreements: a buyer-friendly pro-sandbagging clause; a seller-friendly anti-sandbagging clause; or no provision, in which event the parties defer to the default rule of the state whose law governs the agreement.

A pro-sandbagging clause permits a buyer to seek recovery for breach of a representation or warranty even if the buyer knew or should have known that the representation or warranty was false. An anti-sandbagging clause prohibits a buyer from seeking recovery in such a circumstance. Deal parties also may draft pro-sandbagging language that applies to specifically negotiated indemnities, particularly when such risks are excluded under a representation and warranty insurance policy.

The parties also can remain silent about sandbagging, an approach that is increasingly common. Where an acquisition agreement is silent, a court will apply the default rule in the jurisdiction that provides the law governing the agreement. New York and Delaware generally permit sandbagging, but the case law is varied in the analysis of the issue.

Listen as our authoritative panel analyses the different approaches that can be taken to sandbagging in M&A documents and the interpretations of sandbagging under New York and Delaware law.