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lender’s broader MAC language. Would an acquirer ever stoop to pressuring its lender to
declare a MAC simply to gain leverage to retrade a deal after it’s been signed up?

Post-Closing Indemnification: "Sandbagging" and Escrow Arrangements

Chu: "Sandbagging" is a term used to describe the ability of the acquirer to rely on
its right to be indemnified with respect to an inaccurate representation made by the
target company, notwithstanding the fact that the acquirer knew that the target’s
representation was inaccurate.

An acquisition agreement will deal with this issue in one of three ways: it will
expressly permit the acquirer to engage in sandbagging, by providing that the acquirer’s
right of indemnification is not affected by its prior knowledge of any inaccuracy in any of
the target’s representations; it will contain an anti-sandbagging clause precluding the
acquirer from recovering for breaches of representations it originally knew to be
inaccurate; or it will be silent on the issue.

My firm did a study of middle-market deals done in 2001, involving publicly-
traded acquirers buying privately-held targets. Steve Glover wrote an article observing
that about 18% of the deals surveyed had anti-sandbagging clauses. In comparison, our
study found 5.66% of the surveyed deals had anti-sandbagging provisions.

Climan: Of course, an acquirer perceives the term "sandbagging" as a pejorative
term.10 Acquirers routinely insist on sandbagging clauses — or, as they might label them,
"benefit-of-the-bargain" clauses — that say, in effect, "I can close the merger and then
sue the target company’s stockholders (or recover money from the escrow/holdback
fund) for an inaccurate representation even if I clearly knew, before I signed the merger
agreement, that the representation was dead wrong."

That sounds like a very unpopular and unfair position for an acquirer to assert, and
when the clients themselves are at the negotiating table, it may be very hard for the buyer
to defend that position. But I happen to believe that it’s generally a logical position for
an acquirer to be taking. Without that type of clause in the merger agreement, every
straightforward claim made by the acquirer after the closing with respect to an inaccuracy
in the target’s representations will be met with an assertion by the defendants that the

10 For a list of interesting cases where courts have considered sandbagging issues, and cites to
cases construing "material adverse change" clauses, e-mail Rick Climan at rcliman@cooley.com.

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