As most readers know, “sandbagging” in the M&A context refers to the ability to rely on the other side’s representations even you know that the rep is inaccurate when made. Delaware has long been viewed as a “pro-sandbagging” state, but language in the Delaware Supreme Court’s decision in Eagle Force Holdings v. Campbell, (Del.; 5/18), called that conclusion into question.
The Chancery Court’s recent decision in Arwood v. AW Site Services, (Del. Ch.; 3/22), may help lessen that uncertainty, because it provides a strong statement in support of the view that Delaware remains pro-sandbagging even after Eagle Force Holdings. As this excerpt from Goodwin’s memo on the decision notes, the Eagle Force Holdings decision was front & center in Vice Chancellor Slights’ analysis:
Given the vice chancellor’s finding that the buyer knew or should have known the seller’s representations were false, he asked the parties to submit post-trial briefs on the state of Delaware’s law regarding “sandbagging”. The vice chancellor was particularly interested in the impact, if any, that the Delaware Supreme Court’s 2018 opinion in Eagle Force Holdings, LLC v. Campbell had on the question.
Prior to Eagle Force, it was commonly understood that Delaware was “a pro-sandbagging state” — a state that allowed a buyer to sandbag a seller, even when their agreement was silent on the issue. However, Eagle Force was seen by many commentators as casting a measure of “doubt” on the idea that a buyer can “turn around and sue because of what he knew to be false remained so,” and drew questions about the extent to which parties could recover on a breach of warranty claim in Delaware when it knew at signing certain warranties were not true.
After considering the parties’ briefing, Vice Chancellor Slights concluded that sandbagging is and should be allowed under Delaware law because it is consistent with Delaware’s “profoundly contractarian predisposition,” including its public policy favoring private ordering, history of enforcing good and bad agreements, and exclusion of reliance as an element required to establish a breach of contract claim. The court also considered that a pro-sandbagging rule supports the notion that representations and warranties serve an important risk allocation function in transactions.
The memo says that post-Arwood, it is even more important that a seller wishing to avoid being sandbagged in a deal governed by Delaware law obtain an explicit anti-sandbagging provision in the parties’ contract. Based on the available evidence, that remains a tough ask – according to the ABA’s 2019 Private Targets Deal Points Study, only 4% of purchase agreements included an anti-sandbag clause.
– John Jenkins