In the context of M&A transactions, one should never neglect the possibility that the buyer is aware that a representation and warranty is false or inaccurate and, despite this, chooses to sign the contract in order to make a claim against the seller. This is where prosandbagging and antisandbagging clauses come into play.
Índice
Where does the expression sandbagging come from
In the sport of golf, a sandbagger is a player who plays underhand, who plays below his real ability in order to gain an advantage over his opponent. Because by lying about his skills, a sandbagger gets a better handicap. This allows him to have more strokes and thus increases his chance of victory.
Similarly, in a corporate sale and purchase, the term sandbagging refers to the situation where the buyer becomes aware that a representation and warranty is false or inaccurate. This information can usually be obtained through due diligence, but can also be obtained in any other way. Despite this, he chooses to sign the M&A contract and then holds the seller liable.
What are prosandbagging and antisandbagging clauses
In view of this possibility, the two parties are increasingly regulating their position with regard to sandbagging in order to avoid future disputes. If a dispute arises, the judge or arbitrator will take into consideration the common intention of the parties.
These are the most commonly negotiated clauses in M&A contracts:
- The anti-sandbagging clause, which provides that the buyer may not recover for any non-performance of which he had or could have had knowledge. In other words, prior knowledge will prevent the buyer from claiming damages. This is the most common type of clause in Spain.
- The prosandbagging clause, which works the other way around and provides that the buyer’s right of indemnification is not limited by the knowledge he may have or may have obtained in the framework of the statutory audit. In other words, prior knowledge on the part of the buyer will not affect the seller’s liability.
How to act in the event of a prosandbagging dispute
Although the prosandbagging clause is common, there is no consolidated Supreme Court case law on its effectiveness. This requires a case-by-case analysis, taking into account all the circumstances of the transaction and what was agreed by the parties in the purchase contract.
If the buyer detects a contingency during the due diligence process and, under the cover of a prosandbagging clause, decides to claim the damage from the seller, he may invoke in his defence the autonomy of the will of the parties, the work of allocation and distribution of risks in the operations of these clauses or the assimilation of the clause to a promise of guarantee by the seller. In our opinion, the most advisable thing to do in these cases is to negotiate a reduction of the price or to agree on a specific indemnity. In the specific indemnity it will be important to regulate how the damage will be quantified if it materialises and to foresee the possibility of claiming the damage as soon as it can be quantified, even if there has not been an effective disbursement.
On the other hand, the seller can argue that the buyer’s action is contrary to contractual good faith, that it is an abuse of rights or that the buyer gave tacit consent to this contingency because he knew about it before signing the contract and did not demand a specific indemnity to cover it. In order to prevent such situations, we recommend that sellers deposit the due diligence information with a notary, so that they can prove exactly what information the buyer had access to.
Key clauses to manage the risk of the operation
These are clauses that require arduous negotiation between seller and buyer, as they play a significant role in the allocation of risks. Confianz’s team of M&A specialists has extensive experience in mergers and acquisitions and can accompany you throughout the entire process with maximum guarantees.