Crafting Language in an Acquisition Agreement: Part Two

November 21, 2017

By J. Marc Ward

Recently, we introduced the topic of the “legalese” that lawyers negotiate in acquisition agreements.  This week we will take a look at two more examples of commonly negotiated terms.

Full Disclosure Representation

Buyers and their lawyers love the full disclosure and 10b-5 disclosures. These disclosures can make up for a lot of missed opportunities in the other representations by seller. The full disclosure representation goes something like this:

“Seller does not have knowledge of any fact that may materially adversely affect the assets, business, prospects, financial condition or results of operations of the seller that has not been set forth in this agreement.”

More popular with buyers is the 10b-5 representation:

“No representation or warranty or other statement made by seller in this agreement or otherwise in connection with this transaction contains any untrue statement or omits to state a material fact necessary to make any of them, in light of the circumstances in which it was made, not misleading.”

Sellers should avoid these sweeping, all-encompassing representations. If there is something specific the buyer is concerned about, address it in the representations. The buyer’s comeback is to say that the seller knows its company; buyer does not. As you might expect, buyers and sellers win on this issue about half the time. A compromise is to have the representation “knowledge qualified,” as we discussed last week.


What do lawyers mean by sandbagging and anti-sandbagging provisions? Well, what should happen if during the course of a buyer’s due diligence, the buyer comes across a file (the contents of which will obviously lead to litigation at some later date) post-closing? Does the buyer have a duty to tell the seller or not? Sandbag the seller or not?

A pro-sandbagging clause might look like this:

“The right to indemnification based upon the seller’s representations, warranties and covenants shall not be affected by any investigation conducted with respect to or any Knowledge acquired at any time with respect to the accuracy or inaccuracy of or compliance with any such representations, warranties and covenants.”

An anti-sandbagging clause would instead say:

“No claim for indemnity for a breach of a representation, warranty or covenant shall be made after the closing if the Buyer had Knowledge of such breach as of the closing.”

The reasons why a seller would want an anti-sandbagging clause are obvious. Buyers on the other hand would want to avoid such a clause because is shifts the inquiry from the breach of a representation, warranty or covenant to whether the buyer had knowledge of it. What if a representative of the buyer receives a file and either neglects to look at it or doesn’t realize its implications? Does the buyer have knowledge?

More to the point, what buyer would prefer to sandbag a seller rather than address the issue before the closing?