In the first article of our series on “scrapes”, we looked at the materiality scrape and how such a clause can be used by the buyer to ensure that disputes around materiality will not be factored into any dispute related to, for example, the determination of whether or not the seller has breached a representation or warranty in the agreement, or the quantification of a loss resulting from a breach. Let’s now take a look at the pros and cons of including a materiality scrape in the share purchase or asset purchase agreement.
Arguments For Scrapes
Materiality scrapes are generally to the benefit of the buyer, as they will, in one way or another, remove qualifiers that are to the seller’s benefit. However, owing to their versatility, materiality scrapes can result in residual benefits to both parties.
One obvious example is that materiality scrapes can create more room for negotiation between buyer and seller. For instance, it may be of particular importance to the seller that a certain representation be qualified as to its materiality so as to provide the seller with some comfort in its disclosures, while the buyer may be concerned with the added uncertainty of a materiality qualifier for purposes of identifying a breach after closing. In such a case, using a materiality scrape to “read out” the qualifier when identifying a breach while maintaining it for purposes of disclosure allows both parties to get what they want out of the representation.
Materiality scrapes can also limit or eliminate post-closing materiality disputes. Removing materiality qualifiers necessarily removes a certain level of uncertainty when it comes to interpreting provisions for purposes of identifying a breach or quantifying losses, for instance.
Perhaps the most significant mutual benefit of the materiality scrape is its ability to help streamline the negotiation process. Negotiations around representations and warranties too often get hung up on if, and where, to include qualifiers. A materiality scrape limits the importance of these qualifiers by prioritizing them for certain points (e.g. disclosure and closing conditions), and eliminating them for others (e.g. post-closing breach and calculation of loss).
It is thanks in part to these benefits that materiality scrapes are gaining popularity in the United States and Canada, as parties look for more ways to streamline negotiations and resolve the classic winner-take-all approach to qualifying reps and warranties, reducing legal fees in the process, and helping to narrow the divide between buyer and seller.
There are of course, a number of issues with the use of materiality scrapes that have been identified, particularly from the seller’s perspective. We will explore these in our next article in this four-part series on scrapes.
This article is for informational purposes only and does not constitute legal advice. If you wish to discuss your issue with a lawyer, contact Martin today. 613-747-2459 ext.308, [email protected]