Sandbagging in M&A Transactions: Default Rules in Delaware, New York and California

October 18, 2016

One of the most confusing legal issues facing foreign buyers of U.S. assets is governing law. Especially for Asia-based clients whose legal system is civil law-based and uniform throughout the country, the U.S.’s state laws/federal laws/common law system is, well, foreign. Often, clients are not aware that different states treat a particular legal issue differently and that choosing whether New York law or Delaware law, for example, will apply will have divergent consequences on a variety of legal issues. Recent market forces have enabled China-based buyers to leverage the high valuations they are enjoying in their home markets in order to bid for U.S.-based assets at never before seen valuations, especially for assets deemed to be critical to economic growth or social services in China. China-based buyers may be able to leverage the high valuations they are offering to dictate the governing law of a document, an issue often not considered to be important by many and an easy “give,” to gain some advantage on one of the most critical issues in an acquisition agreement.