November 2, 2018

Time to Dust Off Those Pro-Sandbagging Clauses in Delaware?

Earlier this year, I blogged about how some language in a recent Delaware Supreme Court decision has caused practitioners to question the long-held assumption that Delaware is, as Vice Chancellor Laster once put it, “affectionately known as a ‘sandbagging’ state.” Weil’s Glenn West has a recent blog discussing this new-found uncertainty. He suggests that parties may want to address sandbagging directly in their acquisition agreement – and includes the following model “pro-sandbagging” clause:

No Waiver of Contractual Representations and Warranties.  Seller has agreed that Buyer’s rights to indemnification for the express representations and warranties set forth herein are part of the basis of the bargain contemplated by this Agreement; and Buyer’s rights to indemnification shall not be affected or waived by virtue of (and Buyer shall be deemed to have relied upon the express representations and warranties set forth herein notwithstanding) any knowledge on the part of Buyer of any untruth of any such representation or warranty of Seller expressly set forth in this Agreement, regardless of whether such knowledge was obtained through Buyer’s own investigation or through disclosure by Seller or another person, and regardless of whether such knowledge was obtained before or after the execution and delivery of this Agreement.

Glenn acknowledges that in the days before silence on the sandbagging issue became the preferred option in Delaware contracts, getting a seller to sign-on for a clause like this was like pulling teeth.  What’s his recommendation for buyers in the new environment? Pull harder:

If the seller does not wish to expose itself to the vagaries of extra-contractual claims based on what the seller might have known or might have told the buyer outside the four corners of the agreement, why should the buyer? Why does the buyer’s purported knowledge of the breach of any of the seller’s express, contractual representations and warranties eliminate even the limited remedies against the seller that were bargained for by the buyer?

John Jenkins