Sandbagging: A Primer

Published date09 December 2022
Subject MatterCorporate/Commercial Law, Insurance, M&A/Private Equity, Insurance Laws and Products, Securities
Law FirmKramer Levin Naftalis & Frankel LLP
AuthorMr Arthur Aufses III, Lee Turner Friedman, Adi Herman, Howard Spilko, Ernest Wechsler, Jennifer S. Windom and Jack Herman

What Is Sandbagging?

In the 19th century, "ruffians roamed the streets" and robbed "unsuspecting victims" using a tactic knowing as "sandbagging": They wielded "ostensibly harmless socks" that were in fact "filled with sand and used as weapons." 1

Today, sandbagging has a different - and, thankfully, less violent - meaning. It describes a buyer that asserts a claim for breach even though it knew, or had reason to know, before the deal closed that a representation was untrue. In other words, the buyer had knowledge of the breach, or the relevant facts that led to the breach, but went through with the deal anyway, only to bring a claim for breach after closing.

This article explores how transactional practitioners address sandbagging in acquisition agreements, and the default rules that courts may apply when the deal parties are silent on the issue.

Contractual Approaches to Sandbagging in Deal Documents

The practice of sandbagging is so common that dealmakers have developed a standard "playbook" for addressing it in acquisition agreements.2 Deal parties can adopt one of three contractual approaches: the buyer-friendly "pro-sandbagging" clause; the seller-friendly "anti-sandbagging" clause; or silence, in which event the parties defer to the default rule of the state whose law governs the agreement.

  • Pro-Sandbagging Clauses: A pro-sandbagging clause permits a buyer to seek recovery for breach of a representation or warranty even if the buyer knew, or had reason to know, that the representation or warranty was false prior to closing. For example, an agreement might provide that the right to a remedy "will not be affected by any Knowledge acquired (or capable of being acquired) at any time, whether before or after the execution and delivery of this Agreement or the Closing Date, with respect to the accuracy or inaccuracy of such representation [or] warranty." 3 Deal parties also may specifically provide for pro-sandbagging-type language that applies to matters for which a special indemnity was negotiated, particularly when such risks are excluded under a representation and warranty insurance policy.

From the buyer's perspective, a pro-sandbagging clause helps ensure it will receive the benefit of its bargain. The buyer believed its target had a certain value based on representations and warranties made by the seller. If the representations are false, buyers say, they overpaid and should be compensated. Buyers also argue that pro-sandbagging clauses provide the parties with greater certainty. For example, they remove certain hurdles to recovery, such as a prolonged and costly dispute during the indemnification process about the buyer's pre-closing knowledge.

  • Anti-Sandbagging Clauses: An anti-sandbagging clause, on the other hand, would prohibit a buyer from seeking recovery where it knew prior to closing (or, depending on its scope, had reason to know) that a representation was false. For example, the agreement may provide that seller shall not be liable "for any Losses resulting from or relating to any inaccuracy in or breach of any representation or warranty in this Agreement if the party seeking indemnification for such Losses had Knowledge of such breach before Closing."4 The...

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