Sandbagging In Cross-Border M&A: Clear Skies In Delaware, Still Cloudy In Canada

A version of this article originally appeared in Business Law Today, the ABA Business Law Section's digital magazine offering in-depth articles, quick summaries of the month's key developments by practice area, checklists and other practical tools, and more.

There are few issues as sensitive in private mergers and acquisitions ("M&A") as "sandbagging." As deal lawyers know well, "sandbagging" refers to a scenario where an M&A buyer brings a post-closing indemnification claim based on a breached seller representation and warranty that the buyer was arguably aware of prior to closing.

The recent ruling of the Delaware Court of Chancery in In re Dura Medic Holdings, Inc. has finally provided certainty in Delaware.¹ However, cross-border M&A lawyers should know that the question remains open in Canada.

Sandbagging: Market Practice

The possibility of sandbagging presents M&A parties with three options: they can (1) include a "pro-sandbagging" clause that expressly permits it, (2) include an "anti-sandbagging" clause that expressly prohibits it, or (3) forgo any sandbagging clause and remain silent on the issue.

Which approach is most common? According to the most recent American Bar Association private target M&A deal point studies, the answer is clear: remaining silent is the most common avenue.² In the United States, 76 percent of deals were silent on sandbagging, with 19 percent of deals including a pro-sandbagging clause and 5 percent of deals including an anti-sandbagging clause. In Canada, 82 percent of deals were silent on sandbagging, with 10 percent of deals including a pro-sandbagging clause and 8 percent of deals including an anti-sandbagging clause.

The question that follows is this: What approach to sandbagging would a court take when faced with contractual silence? The answer is now certain in Delaware. Things unfortunately remain murky in Canada.

Sandbagging in Delaware: Finally, Crystal Clear Skies

In Dura Medic Holdings, the buyer claimed damages for the seller's breach of a representation and warranty stating that the target had not received notice of noncompliance with health-care laws in the preceding three years. The seller's disclosure schedules had identified one such notice, but post-closing the buyer discovered others, and the additional regulatory review resulted in significant expense. The seller defended the claim on the basis that it had informed the buyer of the additional notices during a pre-closing due diligence call. The purchase agreement was silent on sandbagging. This put sandbagging squarely before the Delaware Court of Chancery.

Previous Delaware rulings had waffled somewhat. Historically, U.S. deal lawyers were confident that Delaware was a pro-sandbagging jurisdiction even without precedent directly on point. However, an aside by the Delaware Supreme Court in 2018 caused confusion by stating that "[v]enerable Delaware law casts doubt" on a buyer's ability to sandbag.³ Subsequent and more favorable obiter comments by Delaware courts on sandbagging calmed U.S. lawyers' concerns.⁴

But it was not until Dura Medic Holdings, decided earlier this year, that the issue of sandbagging was confronted head-on. The court rejected the seller's defense, explaining that the seller's disclosure during the due diligence call "has no bearing on the legal analysis."⁵ The reason was that a "breach of contract claim is not dependent on a showing of justifiable reliance."⁶ The result was that having "contractually promised [the buyer] that it could rely on certain representations, [the seller] is in no position to contend that [the buyer] was unreasonable in relying on [the seller's] own binding words."⁷

Notwithstanding that the purchase agreement was silent on sandbagging, the alleged knowledge of the buyer at execution that the representation was inaccurate did not impact the buyer's ability to later claim for a breach of the representation. Stated more simply, Delaware is a pro-sandbagging jurisdiction.

Sandbagging in Canada: Still Cloudy, Twenty Years and Counting

The law around sandbagging in Canada is much less clear. The principal reason is conflicting appellate precedent from over two decades ago. Neither ruling was directly on point, but their general implications for sandbagging are relatively uncontroversial. The first, a 2001 ruling of the Alberta Court of Appeal ("ABCA"), appeared to endorse sandbagging.⁸ The second, a 2003 ruling of the Ontario Court of Appeal ("ONCA"), cast doubt on it.⁹

The waters have since been muddied further by related rulings by the Supreme Court of Canada ("SCC") regarding the duty of good faith in contract in 2014¹⁰ and 2020.¹¹ The first established good faith as a "general organizing principle" of the common law, which includes a duty of honest performance in contract.¹² It explained that this includes a duty that parties "not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract."¹³ The second elaborated that dishonest performance may include "lies, half-truths, omissions, and even silence, depending on the circumstances."¹⁴

Neither ruling addresses sandbagging. But it is arguable that the SCC's treatment of good faith and honest performance could undermine an attempt at sandbagging, along the lines of the ONCA ruling. Alternatively, a court could instead focus on the SCC's instruction that good faith does not require a counterparty to "forego advantages flowing from the contract,"¹⁵ along the lines of the ABCA ruling.

Practical Takeaways for Cross-Border Private M&A

Sandbagging raises complicated issues. Luckily for U.S. M&A lawyers, things have been greatly simplified by Dura Medic Holdings. On the other hand, given the continued uncertainty in Canada, U.S. M&A lawyers should remain vigilant regarding the potential complications surrounding sandbagging when working on cross-border deals. Given that the large majority of Canadian private M&A agreements go silent on sandbagging, these potential complications will quickly take on practical, real-world significance should a buyer foresee a possibility of sandbagging or should the seller suspect that the buyer may engage in sandbagging.

M&A parties should also be aware of related practical considerations relevant to sandbagging. For example, when acting for the buyer and the agreement is either silent on sandbagging or includes an anti-sandbagging clause, lawyers should be alert to the possibility that the seller might be tempted to engage in a "document dump" whereby a large amount of disclosure is made in the run-up to execution or closing. Related considerations regarding the drafting of the purchase agreement include (1) cross-referencing and whether disclosure in one disclosure schedule may constitute disclosure with respect to related disclosure schedules and (2) whether the acquisition agreement addresses updates to the seller's disclosure schedules prior to closing (in the event of a transaction that has an interim period between signing and closing). Specific considerations regarding the latter include whether the agreement is silent on the point, expressly prohibits it, or expressly permits or requires it. This is important because whether (and under what conditions) the seller is permitted to update its disclosure schedules post-execution but prior to closing can impact the chance of sandbagging issues later arising.

Footnotes

1. In re Dura Medic Holdings, Inc., No. 2019-0474-JTL, 2025 Del. Ch. LEXIS 47 (Jan. 29, 2025).
2. See the 2023 ABA Private Target Mergers & Acquisitions Deal Points Study (including transactions from 2022 and Q1 2023) and the 2025 ABA Canadian Private Target Mergers & Acquisitions Deal Points Study (including transactions from 2020, 2021, and 2022).
3. Eagle Force Holdings, LLC v. Campbell, No. 10803, 2018 Del. LEXIS 233, at *66 (May 24, 2018).
4. See, e.g., Arwood v. AW Site Servs., No. 2019-0904-JRS, 2022 Del. Ch. LEXIS 57 at *7 (Mar. 9, 2022) ("In my view, Delaware is, or should be, a pro-sandbagging jurisdiction.").
5. Dura Medic Holdings, 2025 Del. Ch. LEXIS 47, at *40.
6. Id. at *41.
7. Id. at *42.
8. Eagle Res. Ltd. v. MacDonald, 2001 CanLII 264 (Can. Alta. C.A.).
9. Transamerica Life Can. Inc. v. ING Can. Inc., 2003 CanLII 9923 (Can. Ont. C.A.).
10. Bhasin v. Hrynew, 2014 CanLII 71 (S.C.C.), [2014] 3 S.C.R. 494.
11. C.M. Callow Inc. v. Zollinger, 2020 CanLII 45 (S.C.C.), [2020] 3 S.C.R. 908.
12. Bhasin, 2014 CanLII 71.
13. Id.
14. Callow, 2020 CanLII 45.
15. Bhasin, 2014 CanLII 71.

Originally published July 18, 2025

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