Bring-Down Condition
(with Materiality Scrape)

Summary

A common condition to the obligations of the parties to close an acquisition transaction is that all representations and warranties made in the acquisition agreement be true and correct at the time of the closing. This provision is known as a "bring-down" of the representations and warranties and is relatively standard across transactions with some minor variations, which are discussed below. This clause is drafted as a condition to the obligation of the buyer to close; the seller's obligations are often qualified with a similar condition. This template includes practical guidance, drafting notes, and an optional clause. The Standard Bring-Down Condition A bring-down condition usually qualifies the obligations of both the buyer and the seller, however it is mainly for the benefit of the buyer, since the seller(s) or the target give most of the representations and warranties in the acquisition agreement. The simplest bring-down condition will state that for a party to be obligated to close, the representations and warranties made in the agreement by the other parties must be true and correct as of the closing date, or, since some representations are made of a specific date (for example a representation as to a shareholder list or representations made as of the date of the company's last audited financial statements), the date as of which such representation is made. If this is not the case, the party to whom the representations are made is not required to proceed with the closing. Materiality A bring-down condition is often qualified by materiality. The condition will state that the representations and warranties must be true and correct in all material respects, or except as would result in a Material Adverse Effect, if there is a defined MAE concept in the agreement. Although MAE qualifiers are very common in bring-down conditions, buyer's counsel should be aware that this is a very high threshold and in most cases, the buyer will be required to close even in the event of a significant breach of a representation at closing. For more information on materiality and the definition of Material Adverse Effect, see Material Adverse Change Definition Clause and Material Adverse Change Definitions. Materiality Scrape For representations and warranties that are qualified by materiality in their text, including a materiality standard in the bring-down creates the risk of the materiality qualifier being applied to the same representation twice—known as "double materiality." Since this creates uncertainty as to how the materiality standard will be applied, many bring-down conditions that are subject to a materiality standard also include what is known as a "materiality scrape." A materiality scrape provides that, for the purpose of determining the obligation to close, all materiality qualifications in the representations and warranties will be disregarded. The result of this provision is that, when determining whether the condition has been satisfied, one materiality qualifier applies across all representations and warranties, whether or not the individual representations themselves are qualified by materiality. Interaction with Other Provisions Termination If the bring-down condition is not fulfilled, the party whose condition it is may terminate the acquisition agreement. Frequently, there is a cure period in which the party giving the representation may attempt to resolve whatever circumstance has made the representation inaccurate. A cure period may be a stated amount of time (e.g., 30 days after notice of the inaccuracy is given) or it may last until the drop-dead date. If the acquisition agreement provides for a termination fee, a termination solely because the bring-down condition is not satisfied does not usually trigger payment of the fee. Some agreements, however, do require payment of a termination fee if the agreement is terminated because of an inaccurate representation and the target subsequently enters into an alternative transaction. For more information about termination provisions, see Termination Provisions in M&A Transaction Agreements and Termination Rights and Fees in Acquisition Agreements. Disclosure Schedules / Notification of Subsequent Events Many acquisition agreements contain a provision requiring the seller to notify the buyer of any occurrence that would cause a representation or warranty to become inaccurate. The acquisition agreement may also contain provisions permitting the seller to update its disclosure schedules in the period between signing and closing (see Disclosure Schedule Updates Clause (Acquisition Agreement)). Both of these provisions help a buyer become aware that the seller may not be able to satisfy the bring-down condition. Anti-sandbagging In the event that the buyer proceeds with the closing despite an inaccurate representation (either because the inaccuracy did not rise to the materiality threshold or because the buyer chose to waive the closing condition), the buyer may wish to make an indemnification claim for damages suffered as a result of the inaccuracy. If the acquisition agreement contains an anti-sandbagging clause, however, this claim will be barred. Buyer's counsel should be aware of this potential result when negotiating materiality qualifiers in the bring-down condition and sandbagging clauses. For more information about sandbagging provisions, see Sandbagging Clauses. Indemnification In addition to the limitations on recovery of damages that may result from anti-sandbagging provisions, any limitations on indemnification, such as de minimis thresholds or deductibles, may also limit a buyer's ability to recover for damages from inaccurate representations, should the buyer elect to close the transaction. For more information on limitations on indemnification, see Indemnification Provisions in Private Acquisition Agreements — Limitations. Closing Deliveries The officer's certificate that each party must deliver at the closing will contain a statement by the signing officer confirming that the bring-down condition has been fulfilled. The text of this statement should be taken word-for-word from the bring-down condition (with all materiality qualifiers and dates included). For examples of such a closing certificate, see Officer's Certificate (Stock Sale), Officer's Certificate (Asset Sale), and Officer's Certificate (Merger). Bring-Down Precedents Click here to see recent examples of bring-down conditions in publicly filed acquisition agreements in Market Standards, the Practical Guidance database of publicly filed M&A deals that enables users to search, compare, and analyze transactions using 150+ deal points to filter search results.