By: Scott Bleier
In connection with the sale of a business, the seller will typically make a series of factual representations and warranties about its business to the buyer. The scope of these representations and warranties is often the subject of significant negotiation by legal counsel to both the buyer and seller and, invariably, one of the areas of “give and take” between the parties is determining which representations and warranties will be qualified as to the seller’s knowledge and/or materiality. As a counterbalance to these qualifiers, buyers may attempt to introduce a provision into the merger/acquisition agreement that serves to exclude materiality, material adverse effect and similar materiality qualifiers contained in the seller’s representations and warranties for the purposes of determining post-closing indemnification. Commonly referred to as a “materiality scrape”, this type of language reallocates indemnification risk from the buyer to the seller and should be reviewed by sellers and their legal counsel with a critical eye.
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