Sandbagging
A buyer's practice of closing a transaction despite knowing of a breach of seller's representations or warranties, then bringing an indemnification claim post-closing for that known breach. Whether sandbagging is permissible depends on the agreement's express provisions and the governing state's default rule.
"Sandbagging" in M&A refers to a buyer's practice of closing a transaction despite knowing of a breach of seller's representations or warranties, then bringing an indemnification claim post-closing for that known breach. Whether sandbagging is permissible depends on the agreement's express provisions and, where the agreement is silent, the governing state's default rule.
Pro-sandbagging clauses (buyer-favorable)
A pro-sandbagging clause provides that the buyer's indemnification rights are not affected or limited by any pre-closing knowledge of the breach. Typical drafting: "Buyer's right to indemnification shall not be impacted or limited by any knowledge that Buyer may have acquired… whether before or after the closing date."
Anti-sandbagging clauses (seller-favorable)
An anti-sandbagging clause prohibits indemnification for breaches the buyer knew (or should have known) about before closing. Typical drafting: "Seller shall not be liable to Buyer for any breach if Buyer had knowledge of such breach before the closing date."
Texas default rule (where the agreement is silent)
Texas has not produced definitive Texas Supreme Court authority establishing the default rule. Texas courts have generally applied contract-based reasoning, treating reps and warranties as bargained-for promises that the buyer is entitled to rely on regardless of pre-closing knowledge, broadly aligning with the "Modern Rule" (followed by Delaware and New York). However, the absence of a controlling Texas Supreme Court decision means Texas-governed agreements should expressly address the issue rather than rely on the default rule.
Market practice
ABA Deal Points Studies report approximately 42% of M&A agreements contain pro-sandbagging clauses, 6% contain anti-sandbagging clauses, and 51% are silent. The "silent" rate is artificially elevated, most "silent" agreements reflect parties who could not agree, leaving the issue for the choice-of-law default rule.
For buyers, the safest position is an express pro-sandbagging clause combined with a Delaware or New York choice of law (the most clearly Modern Rule jurisdictions). For Texas-governed deals, parties should expressly address sandbagging rather than rely on uncertain Texas default-rule authority.
Companion article: Selling Your Business in Texas