Definition - What does Anti-sandbagging mean?
Anti-sandbagging is a clause or provision that is seller-friendly and is usually seen in purchase and sale agreements for mergers and acquisitions. Its main purpose is to make sure that the buyer cannot bring legal action against the seller if there is a breach of warranty that the buyer knew about before closing.
Divestopedia explains Anti-sandbagging
Sandbagging was used in the 19th century to refer to gangsters who filled socks with sand to use as a weapon. Although it seems harmless, these sand-filled socks were very effective in inflicting damage. Today, the term refers to concealing or misrepresenting the true position of a certain entity with the intent of taking advantage of another entity.
In the context of business and finance, sandbagging refers to a circumstance where a buyer knows that a warranty is untrue yet closes anyway, then attempts to hold the seller liable for the breach after closing the deal transaction.
By contrast, anti-sandbagging is the act of including a clause in the purchase and sale agreement that protects the seller by limiting the buyer’s indemnification rights and requires the buyer to prove that there was a lack of knowledge regarding the breach so as to be able to make an indemnification claim.
An example of an anti-sandbagging clause is as follows:
“The Purchaser fully acknowledges that it has exercised due diligence and proper investigation with respect to the Company and that the Seller will not be liable to the Purchaser with respect to any breach of any representation or inaccuracy or warranty in this Agreement if the party seeking indemnification for such Losses had knowledge of such Breach before Closing.”