In the past two weeks we have provided an overview of sandbagging in M&A transactions and discussed strategies that can be used when negotiating this clause. We also provided a brief overview of the consequences of remaining silent with respect to sandbagging. This week we will discuss how sandbagging clauses are used in several jurisdictions around the world.
We conducted a review of several M&A deal studies which collectively covered transactions in Australia[1], the United States[2], Canada[3] and in Austria, Belgium, Denmark, France, Finland, Germany, Italy, the Netherlands, Spain, Sweden and the UK (the European Union Countries)[4] (collectively, the Deal Point Studies). We have noted the following interesting observations in respect of the Deal Point Studies:
- Approximately 45% of deals in Canada, Australia and the United States included a form of sandbagging provision, however, 69% of deals in the European Union Countries included a sandbagging clause.
- Of those deals that included sandbagging provisions, deals in Australia and the European Union Countries favoured anti-sandbagging clauses, whereas deals in Canada and the United States favoured pro-sandbagging clauses.
- Of those deals that included anti-sandbagging provisions, the knowledge of the buyer was limited to actual knowledge in 70% of Australian transactions, however, in Canada, the United States and the European Union Countries the knowledge of the buyer was typically defined more broadly to include both constructive knowledge and actual knowledge.
- Based on the above statistics, it appears that buyers in Canada and the United States have stronger negotiating positions than sellers in the current market. Conversely, sellers in the European Union Countries currently appear to have a stronger negotiating position.
- Australia appears to have the most balanced approach between buyers and sellers. While a majority of deals favoured anti-sandbagging provisions (advantageous to sellers), these provisions were typically qualified by a narrow scope of the buyer's actual knowledge of the breach (advantageous to buyers).
- In respect of trends, the Deal Point Studies indicate that sandbagging provisions are becoming more common in Australia, Canada and European Union Countries. Canada in particular has seen a marked increase in the use of sandbagging provisions over the past four years – to the point that it almost matches the use of the provision in the United States. This may be a result of an increase in cross-border transactions and the influence United States legal market trends have on the Canadian market.
While the above is helpful for determining market trends in different jurisdictions, the most obvious conclusion is that (with the exception of the European Union Countries) most M&A deals are still silent on sandbagging. As discussed last week, this can be risky as it leaves the parties at the mercy of the governing law, which (in Canada at least) is relatively uncertain and largely out of the parties' control.
[1] Private M&A Deal Points Study 2015, (March 2016), Norton Rose Fulbright Australia.
[2] Private Target Mergers & Acquisitions Deal Points Study (Including Transactions Completed in 2014), American Bar Association, A Project of the M&A Market Trends Subcommittee of the Mergers and Acquisitions Committee.
[3] Canadian Private Target Mergers & Acquisitions Deal Points Study, 2016 (Transactions signed in 2014 and 2015), American Bar Association, Business law Section, a Project of the Market Trends Subcommittee of the Mergers and Acquisitions Committee.
[4] European M&A Deal Points Study 2015 (deals signed or closed in 2012 or 2013), American Bar Association, Business law Section, a Project of the Market Trends Subcommittee of the Mergers and Acquisitions Committee.
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