What are Sandbagging and Anti-Sandbagging Clauses?

To close our discussion of representations and warranties, I want to provide a brief overview of sandbagging and anti-sandbagging clauses. A sandbagging clause allows a buyer to sue the seller after closing for a breach of a seller representation and warranty that the buyer knew about prior to closing. An anti-sandbagging clause prohibits a buyer from suing a seller after closing for a breach of a seller representation and warranty that the buyer knew about prior to closing.

To create an advantage in the sale, buyers typically want a sandbagging clause since the seller is getting paid to stand behind the representations and warranties, and thus the buyer should be able to enforce seller representations and warranties regardless of when the buyer discovers a breach. Sellers typically prefer an anti-sandbagging clause because it is unfair for a buyer to withhold knowledge of a breach from the seller until after closing and then disclose the breach when the seller may have few, if any, options to cure the breach.

When the seller’s counsel is pushing for an anti-sandbagging clause and the buyer’s counsel is pushing for a sandbagging clause, a common compromise is to leave both clauses out of the purchase agreement. In certain states, however, the courts have determined that, absent a specific anti-sandbagging clause in the purchase agreement, the buyer is free to sue the seller after closing for a breach of a seller representation and warranty that the buyer knew about before closing. In other words, if the agreement is silent on sandbagging, in certain states, sandbagging will be permitted. Thus, from a seller’s perspective, silence is not an equal compromise.

If you have any questions about sandbagging in the context of an M&A deal, please contact Jon Siebers.