Merger And Purchase Agreements Governed By Maryland Law: 'Sandbagging'

Merger and purchase agreements involving Maryland corporations and REITs may be governed by Maryland law. For lawyers accustomed to agreements governed by Delaware or New York law, we are frequently asked to describe key differences that arise under Maryland law so that parties may make informed decisions during negotiations. This is the second post of a multipart series that will describe some common issues that arise in relation to Maryland law. The first post on open performance terms is available here.

In the M&A context, "sandbagging" refers to circumstances where one party, typically the buyer, enters into a purchase agreement knowing representations and warranties made by another party, typically the seller, are false. Alternatively, the buyer may enter into the agreement in good faith, but then discover the falsity prior to closing. In either case, a purchase agreement may (1) permit indemnification claims in such circumstances (a "pro-sandbagging" provision); (2) disclaim indemnification claims in such circumstances (an "anti-sandbagging" provision); or (3) remain silent on the subject. When an agreement is silent, the governing law will determine whether a party may "sandbag" an opponent and then later assert an indemnification claim based upon the breach, or not.

Background

Historically, to bring a claim for a breach of a representation or warranty a party must have relied on the false statement. Prior knowledge of the breach would preclude reasonable reliance on the representation and, therefore, bar a claim for breach. Many jurisdictions, including most prominently California, continue to require that a claimant rely on a representation to bring a valid indemnification claim for a breach of the same (at least in the absence of a pro-sandbagging provision). See Kazerouni v. De Satnick, 279 Cal. Rptr. 74, 75-76 (Cal. App. 1991); but see Telephia, Inc. v. Cuppy, 411 F. Supp. 2d 1178 (N.D. Cal. 2009)(enforcing pro-sandbagging and denying motion for summary judgment). In these jurisdictions, silence as to sandbagging means that a buyer's pre-closing knowledge of a breach of a representation or warranty will bar the claim.

The modern trend is to permit sandbagging even in the absence of an express pro-sandbagging provision. Courts applying this modern approach treat the claim for a breach of a representation in the purchase agreement like any other breach of contract claim. Pursuant to this modern trend, "[t]he key question is not...