Sandbagging: To conceal or misrepresent one's true position,
potential or intent, especially in order to take advantage of.
The use of express sandbagging language in M&A agreements
(whether "pro" or "anti"), or the decision to
remain silent, is commonly one of the most acrimonious issues faced
by M&A practitioners in private acquisitions. The frequency of
these provisions in Canadian M&A and the question of their
enforceability are commonly discussed in light of evolving market
practice and the historically limited guidance from Canadian
HOW DOES SANDBAGGING WORK?
In the course of negotiating a definitive acquisition agreement,
a buyer will typically extract detailed representations and
warranties from the seller regarding the business to be acquired,
along with an indemnity (subject to customary limitations) whereby
the seller will agree to indemnify the buyer post-closing should
any of the reps and warranties prove to be untrue.
The issue of "sandbagging" arises where an acquisition
agreement has been signed and the deal subsequently closes, but
there is an untrue seller rep and warranty in the agreement, and
the buyer knows prior to closing that the rep and warranty is
untrue but proceeds with the closing. In these circumstances, the
question is whether the buyer should be able to sue for a breach of
the untrue rep and warranty — can the buyer
"sandbag" the seller? Sandbagging provisions are intended
to expressly address the parties' negotiated agreement on this
THE PROs AND CONs OF SANDBAGGING
Parties have three options available to address this question:
pro-sandbagging language, anti-sandbagging language, or silence.
For obvious reasons, a seller will generally try to negotiate
anti-sandbagging language, while a buyer may push for
The following is one example of a typical pro-sandbagging
clause, from the American Bar Association's (ABA) Model
Asset Purchase Agreement: No Waiver. The
right to indemnification, reimbursement or other remedy based on
such representations, warranties, covenants and obligations shall
not be affected by any investigation conducted with respect to, or
any Knowledge acquired (or capable of being acquired) at any time.
A buyer will often argue that this kind of pro-sandbagging
provision encourages better disclosure and helps to protect the
buyer from last-minute surprises, including issues uncovered during
the interim period between signing and closing. A buyer will also
want to ensure that its management does not have
"knowledge" of a breach imputed to it where voluminous
diligence materials have been made available and its review has
By contrast, the following is an example of a typical
anti-sandbagging clause, from the ABA's 2015 Canadian
Private Target M&A Deal Points Study (ABA's 2015
Indemnity by the Seller. Notwithstanding the
foregoing indemnities for breach of any representation or warranty,
the Seller shall not be liable under this Indemnity provision for
any damages based upon or arising out of any breach of any of the
representations or warranties of the Seller contained in this
Agreement if the Buyer had Knowledge of such breach prior to or at
This form of anti-sandbagging provision may be coupled with an
express representation and warranty by the buyer that it has no
knowledge of any breach of a representation, warranty or covenant
at either signing or closing.
A seller will often take the position that anti-sandbagging
language encourages the buyer to bring forward any potential
diligence issues before closing, and to avoid a "gotcha"
scenario where the buyer seeks to use an indemnity claim to
effectively reduce the purchase price.
Where a buyer makes a post-closing indemnity claim, this type of
anti-sandbagging provision typically leads to disputes around what
the purchaser "knew" pre-closing. Accordingly, parties
should take care to specify what will constitute "knowledge of
the buyer", including which individuals at the buyer's
organization have knowledge that could preclude a claim.
The use of either a pro- or anti-sandbagging provision will
always be highly fact-dependent and influenced by the tone and
history of negotiations, the parties' relative bargaining power
and nature of the diligence conducted.
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