DealLawyers.com Blog

Delaware law has long been the default option when it comes to the law governing acquisition agreements.  However, with the Lone Star State making a full court press to replace Delaware as the nation’s preferred jurisdiction of incorporation, parties to acquisition agreements may eventually face calls for their agreements to be governed by Texas law.  This Gibson Dunn memo reviews some of the similarities and differences between Delaware and Texas law when it comes to key issues in acquisition agreements. This excerpt points out that one area where the two states may part company is the topic of “sandbagging”:

In Texas, practitioners commonly state that reliance on the seller’s representations is required for a buyer to bring a claim for indemnification. In other words, the buyer’s knowledge does matter if the contract is silent with respect to the buyer’s ability to recover for breaches of which it had pre-closing knowledge.

The policy behind this approach is that the buyer did not rely on the representation to its detriment by closing the transaction if the buyer knew the representation was false prior to closing. However, the case law in Texas addressing sandbagging is less than clear. While there is nothing in the case law suggesting that Texas follows Delaware’s view, there is not a modern case specifically accepting the proposition that the “default” in Texas is that pre-closing knowledge matters in the context of sandbagging.

Parties to agreements governed by either Delaware or Texas law can include contractual provisions specifically allowing or disallowing sandbagging. But if Texas governing law applies, it would be particularly advisable to allow or disallow sandbagging explicitly rather than remaining silent because there is some uncertainty in how Texas courts would address the issue.

Other areas addressed by the memo include non-reliance clauses, MAE provisions, lost premium damages, successor liability, and statutes of limitations.

– John Jenkins