Avoiding Fights Over Double Materiality

An M&A-lawyer boogeyman is “double materiality,” which ostensibly arises when a materiality qualification is included in the bringdown condition to one party’s obligation to close, as well as in one or more representations made by the other party. The concern is that double materiality could mean that even though a seller representation qualified by materiality is inaccurate, it’s not inaccurate enough to prevent satisfaction of the bringdown condition to the buyer’s obligation to close, so the buyer could nevertheless be forced to close. Drafters add to the bringdown condition verbiage that aims to neutralize double materiality.

In MSCD 8.48–51 I explain why double materiality is a figment of practitioner imagination. But it’s sufficiently entrenched that simple appeals to reason wouldn’t be sufficient to dispell it. (The ABA Section of Business Law’s 2009 Private Target Deal Points Study noted that of the contracts in the sample study that contained a bringdown condition, most sought to address double materiality in the bringdown condition.)

So here’s a provision I just invented that would aim to convince a buyer that they shouldn’t go into contortions to fend off double materiality:

The parties acknowledge that the informal theoretical concept referred to as “double materiality” does not apply to this agreement, regardless of whether it is recognized for purposes of other agreements, so the level of representation inaccuracy permitted by the materiality qualification in section x.x [the bringdown condition] will not be expanded by the presence of a materiality qualification in a given representation.

I’m under no illusions that anyone will actually use this—it’s just a trial balloon.

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.