Boilerplate 101: Governing Law
Who really cares about all of those boilerplate provisions at the end of your purchase agreement?
Well, you will if your deal ever blows up. This is the first in a series of blog posts where we will talk about some of those boilerplate provisions and what they mean.
It is six months after you closed a deal to sell one of your company’s underperforming divisions and the buyer has just made a significant indemnity claim against your company based on an alleged misstatement in the financial statements for that division. The problem is that you did not discover the misstatement until after you signed the purchase agreement. You made the buyer aware of the situation but the purchase agreement did not allow for your company to update its disclosure schedules concerning this matter. Now what do you do?
Well, first of course you look at the purchase agreement and discover that the agreement doesn’t address sandbagging. While sandbagging is a topic for another day, it is essentially the act of a buyer pursuing a claim for a breach of warranty when the buyer knew prior to closing that the warranty was inaccurate. Parties to an acquisition may include a pro-sandbagging or anti-sandbagging provision in their agreement to specifically address this issue. However, in many cases the parties simply don’t address it because, not surprisingly, it is a contentious issue.
Delaware law governs your purchase agreement. And that my friends is when you discover that that tiny boilerplate governing law provision at the end of your purchase agreement may have just cost you a significant amount of money.
Let’s be honest. No one really gives a lot of thought to what the governing law should be in an acquisition. Usually, the parties will haggle between their own home states and if they can’t reach agreement they will choose a neutral forum such as Delaware or New York. But as the illustration above shows, we all should act more carefully in choosing the governing law. Depending on if you are buying or selling a company the law that governs your contract may have significant impact on your ability to defend against or assert claims when all heck breaks loose after the closing because the deal did not turn out as at least one party had intended.
Using Delaware and New York law as examples, let’s see what happens to our indemnity claim. Delaware may allow sandbagging (see here). Yet, under New York law, a buyer will not be permitted to sandbag if it has actual knowledge that a warranty is false and it obtained that information from the seller, unless the acquisition agreement expressly allows the buyer to sandbag (see here).
The lesson here is to pick a law to govern your contract that will provide you with the best advantage. For example, if you are a seller using New York law may help you avoid having to add anti-sandbagging clauses in your agreement. Why spend hours negotiating over provisions when the governing law can help you get what you want anyway?