The IBA’s response to the war in Ukraine
The pros and cons of anti-sandbagging provisions in share and purchase agreements
As a corporate and M&A specialist, I have frequently encountered the use of anti-sandbagging provisions in share and purchase agreements (SPAs). These provisions are designed to protect buyers and sellers from potential issues arising post-closing. But are they always beneficial for both parties? Let's take a closer look at the pros and cons of anti-sandbagging provisions from the perspectives of buyers and sellers.
Anti-sandbagging provisions, in essence, prevent a buyer from making claims against a seller for misrepresentations or breaches of warranty if the buyer had knowledge of the breach before closing the deal. These provisions promote transparency and fairness in the negotiation process. However, their appropriateness and effectiveness may depend on the specific circumstances of each transaction.
Pros of anti-sandbagging provisions
- encourages thorough due diligence: as buyers cannot make a claim for known breaches, they are motivated to perform comprehensive due diligence to uncover potential issues before closing;
- promotes transparency and fairness: by preventing buyers from ‘sandbagging’ (ie, withholding knowledge of a breach to make a claim post-closing), these provisions encourage open and honest negotiations between parties; and
- reduces post-closing disputes: with anti-sandbagging provisions in place, there is less likelihood of disputes arising after the transaction has closed, thus minimising potential legal costs and time-consuming litigation.
Cons of anti-sandbagging provisions
- ambiguity surrounding ‘knowledge’: the definition of the buyer’s knowledge can be ambiguous, leading to disagreements over whether the buyer was genuinely aware of the breach or not;
- limited protection for buyers: anti-sandbagging provisions can leave buyers exposed to the risk of undisclosed or undiscovered breaches, as they are unable to seek recourse for known issues; and
- may deter potential buyers: some buyers may be unwilling to pursue a transaction if they believe the anti-sandbagging provisions severely limit their ability to seek recourse for breaches.
From the seller's perspective, anti-sandbagging provisions can be beneficial, as they reduce the risk of post-closing claims and litigation. However, it is essential to clearly define the scope of the buyer's knowledge to avoid disputes.
For buyers, the inclusion of anti-sandbagging provisions can be a double-edged sword. While these provisions encourage thorough due diligence, they can also limit the buyer’s ability to seek recourse for known breaches. Consequently, buyers must weigh the pros and cons before agreeing to include anti-sandbagging provisions in an SPA.
In some cases, parties may want to consider tailoring the scope of anti-sandbagging provisions to apply only to direct claims made by the buyer, rather than extending them to third-party claims. This approach can provide a compromise that addresses the buyer’s concerns about potential exposure to unknown liabilities, while still offering the seller protection from post-closing disputes over known breaches.
By limiting the application of anti-sandbagging provisions to direct claims, buyers can retain their ability to seek indemnification from the seller for third-party claims arising from breaches they were aware of before closing. This can be especially important in situations where the buyer's knowledge of the breach may not be sufficient to protect them from potential losses caused by third-party claims. This tailored approach can strike a balance between the interests of both parties, fostering a collaborative negotiation process and reducing the risk of post-closing disputes.
In conclusion, anti-sandbagging provisions can be advantageous for both parties in certain circumstances, but their effectiveness depends on the specific details of each transaction. To ensure the best outcome for all parties, it is crucial to consult with experienced legal counsel when drafting and negotiating share and purchase agreements.