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“Sandbagging,” when used in connection with an M&A dispute, refers to the situation in which a buyer, prior to closing, knows that the seller’s representations and warranties in the acquisition agreement are false, but decides to close the transaction and then seeks to hold the seller liable for that breach. In Arwood et al. v. AW Site Services, LLC, C.A. No. 2019-0904-JRS (Del. Ch. March 9, 2022), Vice Chancellor Slights upheld a buyer’s claim for breach of representations, notwithstanding the sellers’ sandbagging defense based on the buyer’s extensive due diligence. This decision is important because the Delaware Supreme Court, in its 2018 Eagle Force v. Campbell decision, cast doubt on Delaware’s stance on sandbagging. However, the Court of Chancery explained that “Delaware is, or should be a pro-sandbagging jurisdiction.”


This opinion arises from the acquisition by AW Site Services, LLC (AWS) of a waste disposal business that was owned and operated by John Arwood. The court noted that Arwood lacked business sophistication and started in the waste business as a child, collecting cans and bottles from the side of the road. Arwood ran the target business without formal accountings or records and did not have “the know-how or inclination” to prepare financial records or formulate valuations. As a result, AWS took the laboring oar in valuing the business’s assets.   

AWS required and Arwood agreed to “full and unfettered access” to the business’s raw financial data and limited records (including access to Arwood’s own personal bank and credit card accounts). AWS prepared financial statements for the business, valued the business, and prepared the draft asset purchase agreement ‒ which included Arwood’s representations and warranties. Arwood never offered any input or negotiation when he agreed to AWS’s draft agreement, valuations, and purchase price.

After seven months of active due diligence by AWS, the parties signed the APA in October 2018. At the closing, AWS paid a $16 million purchase price. Post-closing, Arwood continued to work for AWS until litigation ensued.

After the closing, the business did not perform as well as AWS had expected. AWS discovered that, pre-closing, Arwood engaged in a “massive fraudulent scheme” by overbilling customers, causing an overstatement of the business’s pre-closing revenue. AWS asserted claims against Arwood for more than $11 million, seeking indemnification under the APA based on the alleged breach of Arwood’s representations and warranties in the APA, among other claims. In a post-trial opinion, the court held that, even though Arwood lacked scienter and AWS did not justifiably rely on Arwood’s misrepresentation, Arwood was obligated to indemnify AWS in the amount of $3.9 million (the indemnification cap set forth in the APA).