Sandbagging
A buyer's practice of closing a transaction despite knowing of a breach of seller's representations or warranties, then bringing an indemnification claim post-closing for that known breach. Whether sandbagging is permissible depends on the agreement's express provisions and the governing state's default rule.
"Sandbagging" in M&A refers to a buyer's practice of closing a transaction despite knowing of a breach of seller's representations or warranties, then bringing an indemnification claim post-closing for that known breach. Whether sandbagging is permissible depends on the agreement's express provisions and, where the agreement is silent, the governing state's default rule.
Pro-sandbagging clauses (buyer-favorable)
A pro-sandbagging clause provides that the buyer's indemnification rights are not affected or limited by any pre-closing knowledge of the breach. Typical drafting: "Buyer's right to indemnification shall not be impacted or limited by any knowledge that Buyer may have acquired… whether before or after the closing date."
Anti-sandbagging clauses (seller-favorable)
An anti-sandbagging clause prohibits indemnification for breaches the buyer knew (or should have known) about before closing. Typical drafting: "Seller shall not be liable to Buyer for any breach if Buyer had knowledge of such breach before the closing date."
Texas default rule (where the agreement is silent)
Texas has not produced definitive Texas Supreme Court authority establishing the default rule. Texas case law on the point is unclear. Texas practitioners commonly read Texas law to require reliance, which would make a buyer's pre-closing knowledge relevant, but no modern Texas case squarely holds that, and nothing in Texas case law suggests Texas follows the Delaware approach. Delaware law generally lets a buyer recover for a breach it knew about before closing. New York does not generally require reliance, but a buyer that closes knowing of a breach the seller disclosed may be held to have waived the claim unless it expressly preserved its rights.
Market practice
The ABA Business Law Section's private target deal points studies track how often acquisition agreements include a pro-sandbagging clause, an anti-sandbagging clause, or neither.
Because the Texas default rule is uncertain, Texas-governed acquisition agreements often address sandbagging expressly. The choice of governing law matters when the agreement is silent, since Delaware and New York treat a buyer's pre-closing knowledge differently from each other and possibly from Texas.
Companion article: Selling Your Business in Texas