M&A Vocabulary – Experts explain: “Sandbagging”

(Golf-)cheating in transactions:

German sales law follows a clear principle: if the buyer is aware of a defect when the contract is concluded, they generally cannot assert any warranty claims based on it (Section 442(1) BGB). This principle is a key reason why extensive warranty catalogues are drafted and negotiated in business acquisition agreements (English: Share Purchase Agreement; SPA).

In the international M&A environment, in the context of the SPA—and in particular the design of its warranty catalogue—you will often come across the term “sandbagging” ¹. The term “sandbagger” is not a legal term; it comes from general usage and, among other things, refers in golf to a player who deliberately plays worse than they can in order to obtain a higher handicap and thus receive bonus strokes in competition—gaining an unfair advantage over their opponent.

In a transaction context, sandbagging therefore refers to a situation where the buyer already knows before signing or closing the SPA that a seller warranty is incorrect, but still enters into the SPA—precisely in order to assert that warranty breach later. In Anglo-Saxon practice, this approach is therefore sometimes also referred to as “close and sue”.

Sandbagging clauses (also: pro-sandbagging clauses) allow the buyer to assert warranty breaches regardless of their own knowledge or negligent lack of knowledge, unless the seller has disclosed the warranty breach in advance in the contractually agreed manner. For buyers, such clauses provide legal certainty, especially given the more difficult issue of attributing knowledge in the case of legal entities and corporate groups.

Sellers, however, often (understandably) perceive these highly buyer-friendly provisions as unbalanced. For example, they allow the buyer to indirectly mislead as to the purchase price if the buyer intends, after signing or closing the SPA, to reclaim part of the purchase price by asserting a warranty breach they already knew about. Sandbagging clauses also create a risk for the seller if, unlike the buyer, the seller has no knowledge of defects at the time the contract is concluded and therefore fails to include appropriate risk-allocation provisions in the SPA.

To mitigate these risks, German SPAs predominantly include so-called anti-sandbagging clauses, which exclude warranty claims where the buyer has actual knowledge or is grossly negligent in not knowing, thereby tying in with Section 442 BGB.

In practice, disputes about sandbagging tend to arise less from fundamental doctrinal questions than from disclosure systems, knowledge definitions, and the quality of due diligence. A well-structured set of disclosure schedules, factbooks, or vendor due diligence reports remains the most effective tool for risk management on the seller side.

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Notes:

1 The term sandbagging did not originally come from golf. Historically, “to sandbag” in the 19th century referred to an assault with a sandbag. Later, the meaning shifted to deception by deliberately holding back one’s strength, including in poker. Only from the mid-20th century onwards was the term used in sport (especially golf) to mean deliberately underplaying.