Delaware Court of Chancery, left, on The Circle in Georgetown, Delaware. Credit: Antony-22 via Wikimedia Commons
Courts have long grappled with the question of how to treat “sandbagging” in M&A transactions—whether a buyer is entitled to post-closing damages against a seller for breach of a representation in the purchase agreement despite the buyer’s contemporaneous knowledge of the misrepresentation. As the Delaware Court of Chancery recently noted in Arwood v. AW Site Services, No. CV 2019-0904-JRS (Del. Ch. March 9, 2022), the issue is so pervasive that transactional planners have created a “sandbagging playbook,” recommending that each side negotiate for either a pro- or an anti-sandbagging provision in the contract, depending on the jurisdiction and the side of the deal where they sit. For instance, a buyer may want an express pro-sandbagging clause to protect its right to bring an indemnity claim after closing. Meanwhile, a seller may push for an anti-sandbagging provision to prevent the buyer from seeking post-closing relief based on what the buyer already knew. Where the agreement is silent on the issue, however, courts will look to the governing law to resolve the contract dispute. In Delaware, New York and California—three popular choices for forum clauses in acquisition agreements—the common law differs.
Delaware
The Chancery Court in Arwood recently announced its view that “Delaware is, or should be, a pro-sandbagging jurisdiction.” That is, absent an express provision to the contrary, Delaware law permits a buyer to sandbag a seller.
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