In the world of mergers and acquisitions, “sandbagging” refers to a buyer’s decision to proceed with a transaction despite discovering—before closing—that one or more of the seller’s representations and warranties are false. The buyer closes the deal anyway, then later asserts an indemnification claim for the breach. The practice raises a fundamental question: should a buyer who knew about a problem before closing still recover under the seller’s express warranties?
The Legal Landscape:
Jurisdictions differ on whether sandbagging is allowed by default. Delaware courts have generally held that a buyer’s pre-closing knowledge does not automatically bar recovery for breach of warranty, absent clear contractual language to the contrary. The rationale is straightforward: express warranties are bargained-for contractual promises to indemnify, and the buyer’s knowledge shapes the representations it negotiates rather than constituting a waiver.
However, knowledge can still matter. If a buyer specifically agrees in the purchase agreement that certain carve-outs or exceptions apply, or if the disclosure schedules explicitly identify the issue, the warranty may not be breached at all. Additionally, clear anti-reliance clauses or knowledge qualifiers can limit the buyer’s remedies.
Pro-Sandbagging vs. Anti-Sandbagging Provisions
Most sophisticated M&A agreements address sandbagging explicitly. A pro-sandbagging clause confirms that the buyer’s indemnification rights survive even if the buyer knew of a breach before closing. Sellers resist these provisions because they effectively convert representations into insurance policies.
Conversely, an anti-sandbagging clause bars indemnification claims for breaches the buyer actually knew about at closing. Buyers fight these provisions, arguing they undermine the allocation of risk the parties negotiated through the representations themselves.
When the agreement is silent, the default rule in many jurisdictions favors the buyer, but deal terms often diverge. Indemnification caps, escrows, and representation-and-warranty insurance policies further complicate the landscape, with parties sometimes limiting recovery to specific thresholds or fraud carve-outs.
Practical Drafting Takeaways:
First, address sandbagging expressly. Silence invites post-closing litigation over what the buyer knew and when. Second, align sandbagging provisions with the overall risk allocation. If the seller accepts capped liability through an indemnity fund or insurance policy, a pro-sandbagging clause may be more palatable. Third, consider knowledge qualifiers carefully. A representation qualified by seller’s knowledge shifts the risk but also narrows the buyer’s recovery. Fourth, document due diligence findings and consider whether to list known issues on disclosure schedules rather than rely on post-closing claims.
Sandbagging provisions may seem technical, but they define whether a buyer’s diligence efforts enhance or waive contractual protection. In every deal, the drafter’s choice—pro, anti, or silent—shapes the remedies available when things go wrong.
Beresford Booth lawyers can help you with your transaction and have decades of experience dealing with all aspects of mergers and acquisitions. Contact us at info@beresfordlaw.com or call (425) 776-4100 to see how we can help.