In connection with an acquisition agreement, a buyer typically conducts a substantial amount of due diligence on the target and its business. However, despite this investigation, a seller must still make representations and warranties concerning the target and its business and is permitted to set out certain exceptions to its representations and warranties on the disclosure schedules.

However, there may be facts, events or circumstances that, although known to a buyer, are not set out on the disclosure schedules and for which a buyer would be permitted to bring a claim for indemnification after the closing (because a representation and warranty of the seller would be inaccurate as a result of the existence of these facts, events or circumstances). This right of a buyer to bring an indemnity claim based on breaches known before closing is referred to as sandbagging.

Practical Law Company has several resources that guide both the negotiation and drafting of pro-sandbagging or anti-sandbagging provisions.

Certain issues are negotiated in almost all private-acquisition agreements for arms'-length deals. Within the topic of indemnification, sandbagging is a primary area of concern. For a chart that summarizes buyer and seller positions for commonly negotiated provisions in private acquisition agreements, including sandbagging, see Key Negotiating Points in Private Acquisition Agreements Comparison Chart. On the issue of sandbagging, the chart describes:

Counsel for buyers and sellers often settle contentious issues by appealing to a market standard. Practical Law Company specializes in informing subscribers of "what's market" for M&A deals. Using the PLC What's Market database, subscribers can determine how hundreds of private acquisition agreements in a dozen different industries have resolved the sandbagging issue. Simply visit the private acquisition agreement database and take the following steps:

This will produce a customized report analyzing the sandbagging provisions in the selected deals.

PLC What's Market recently performed a short survey of private M&A agreements by taking these exact steps. In September 2012, we surveyed 50 recent deals and found that 20 out of 48 deals that contained indemnification provisions (41.67%) included a pro-sandbagging provision, while 28 agreements (58.33%) were silent. For further detail from that survey, see Legal Update, PLC What's Market Wrap-up for the Week Ending September 21, 2012.

Counsel for the buyer would ideally include an explicit pro-sandbagging provision in the purchase agreement. For an example of a pro-sandbagging provision from a stock purchase agreement, see Standard Document, Stock Purchase Agreement (Pro-Buyer Long Form): Section 8.08. For a further description of the buyer's and seller's respective positions, see Drafting Note, Effect of Investigation.

Conversely, the seller wants the agreement to include an anti-sandbagging provision. For an example of an anti-sandbagging provision, see Standard Document, Stock Purchase Agreement (Auction Form): Section 7.04(g). For a discussion of related issues, such as cure for inaccuracies in the disclosure schedules, see Drafting Note, Anti-sandbagging.