DealLawyers.com Blog

I thought this recent blog from Sheppard Mullin about navigating the differences between US & UK market practice for M&A transactions was pretty interesting.  The blog highlights differences in the way dealmakers in the two markets approach purchase price adjustments, due diligence, management equity incentives, MAC clauses, and other deal terms.  This excerpt points out the differences in how US jurisdictions and the UK treat sandbagging:

US Approach. In acquisition agreements in the US, it is common to encounter a “pro-sandbagging” clause. A pro-sandbagging provision allows a party to recover for breaches of representations and warranties even if the party had prior knowledge of the breach, whether before signing or between signing and closing. This clause is a frequent point of negotiation in deal-making. A common alternative is for the acquisition agreement to remain silent regarding sandbagging, which, depending on the state law governing the acquisition agreement, would not foreclose a party from recovery if the party had prior knowledge of another party’s breach.

Sellers, conversely, advocate for an “anti-sandbagging” clause to be included in an acquisition agreement, stipulating that a party cannot recover for breaches of representations and warranties if the party had prior knowledge of the breach. The rationale is that the parties should negotiate any implications of the breach that affect the value of the business prior to signing. In practice, though, anti-sandbagging provisions rarely make it into a final acquisition agreement.

UK Approach. English law tends to favor “anti-sandbagging” clauses in acquisition agreements. English case law supports this position, suggesting that a buyer who knows of a breach is considered not to have relied on the warranty’s accuracy, or to have no or minimal damages, as they are assumed to have assessed the value of the shares or assets knowing the warranty was false. Anti-sandbagging clauses typically restrict the attribution of knowledge to the buyer’s core deal team, excluding knowledge held by external advisors.

The memo also discusses differences between the way the UK & US structure the sale process.  In contrast to the US practice of using letters of intent and exclusivity periods to complete confirmatory due diligence before entering into a definitive agreement, UK buyers are often required to submit fully binding offers with committed financing, and to have completed their due diligence beforehand.

– John Jenkins