You may have heard the term “Sandbagging” in general parlance to mean hiding the strength of something you do or the difficulty of something to be done. In the Mergers and Acquisitions arena, sandbagging means a purchaser seeking to recover for losses post-closing despite having some knowledge of the matter that led to the loss before the closing. Suppose the purchaser discovers a fact while conducting due diligence that directly refutes a representation made by the seller. Should the purchaser be able to remain silent, close the transaction and recover losses that arise as a result of those facts? On the one hand, that might seem unfair. On the other hand, exactly what constitutes “knowledge” of an untruth by the seller, and how does the purchaser know the extent of any losses that could arise post-closing? For these reasons, purchasers should always consider including a “pro-sandbagging” provision in the purchase agreement which allows a purchaser to recover losses whether or not the purchaser had knowledge prior to the closing. The trend in the mergers and acquisitions arena is to be silent on this issue in the agreement. The problem with being silent is that it then leaves the purchaser subject to the laws of the State that govern the transaction. It is better to negotiate an agreed sandbagging provision. In any event, make sure that this provision is negotiated early on in the process so that neither the purchaser nor the seller is sandbagged shortly before the closing.
If you have any questions on Sandbagging or any other M&A issue, please contact Glenn Solomon at firstname.lastname@example.org or 443-738-1522.
ABOUT GLENN D. SOLOMON
Glenn D. Solomon is a principal at Offit Kurman and has provided counsel to businesses and business owners for more than twenty-five years. He has extensive experience in the purchase and sale of businesses, structuring ownership agreements, and advising companies in financial distress.
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