Making Sure Your Survival Clause Works as Intended

An asset purchase agreement (“APA”) contains the following survival clause:

Survival. Subject to the limitations and other provisions of this Agreement, the representation and warranties contained herein shall survive the Closing Date and shall remain in full force and effect until the date that is twelve (12) months from the Closing Date. None of the covenants or other agreements contained in this Agreement shall survive the Closing Date other than those which by their terms contemplate performance after the Closing Date, and each such surviving covenant and agreement shall survive the Closing for the period contemplated by its terms. Notwithstanding the foregoing, any claims asserted in good faith with reasonable specificity (to the extent known at such time) and in writing by notice from the non-breaching party to the breaching party prior to the expiration date of the applicable survival period shall not thereafter be barred by the expiration of such survival period and such claims shall survive until finally resolved.

Questions:

1. Assuming the buyer failed to provide notice of a claim prior to the closing, does this clause preclude the buyer from asserting a claim against the seller based upon an alleged breach by the seller of the preclosing covenant to conduct the target business in the ordinary course?
2. Assuming the buyer failed to give notice of a claim within twelve months after the closing, does this clause preclude the buyer from asserting a claim against the seller based upon an alleged breach of the seller’s contractual representation regarding the financial statements of the target business?

On its face the answer to both questions should be yes, right? Obviously, the preclosing covenant regarding operation of the target business did not contemplate performance by the seller after the closing date. If the financial statement representation only survived the closing for twelve months and no notice of an alleged breach had been given before that time, doesn’t that mean the seller is home free?

Well, if Delaware law applied, that may well be the correct answer (although best practices would still be to make the clause a lot clearer). But this particular APA was governed by Ohio law, not Delaware law—and a recent decision by a federal district court applying Ohio law, Bidwell Family Corp. v. Shape Corp., declared that the answer to these questions was a definitive no!

Survival: Specificity Important to Get the Result You Want

Why? Well it’s pretty simple, really. Saying a covenant, representation, or warranty “survives” the closing for some specified period assumes that it would otherwise die absent that declaration of survival (and, more importantly, that the death of the covenant, representation, or warranty would also preclude bringing any remedies for its breach after that death even though the breach occurred while it was still alive). While there is Delaware law indicating that “[a]bsent contract language providing to the contrary, pre-closing representations about the acquired property interest become ineffective post-closing under the same rationale that causes representations about real property to merge with a warranty deed,” I am not sure I would place much reliance on that. Instead, if you want to be certain that all representations and warranties do not survive (and any attendant remedies for their prior breach are unavailable post-closing), I suggest saying so in unequivocal language, even in Delaware.

But when you do want certain representations and warranties (and perhaps covenants) not only to survive but also to restrict the available period during which an action can be commenced for their breach (to a period shorter than the otherwise applicable statute of limitations), does simply saying that they “survive” for a specific period do the trick?

Bidwell: “Unequivocal Language” Required to Create Contractual Statute of Limitations

In Bidwell, applying Ohio law, the court focused on the fact that the clause in question “imposed no independent time limit on when [the Buyer] could bring indemnifications claims.” According to the court, if the reference to “survival” was intended to actually constitute a “contractual statute of limitations,” then there needed to be “unequivocal language” to do so under Ohio law. Turning to the survival clause in the APA, the court said:

[T]he APA . . . lacks the “unequivocal language[]” . . . required under Ohio law to limit the time period in which [the Buyer] could make its indemnification claims. The [Sellers] argue that the APA does contain such unequivocal language, pointing to the final sentence of § 9.01 which provides that claims notified “prior to the expiration date of the applicable survival period shall not thereafter be barred by the expiration of such survival period and such claims shall survive until finally resolved.” . . . The only thing this sentence says unequivocally is that claims notified prior to expiration of the survival period will survive; while the inference could reasonably be drawn that claims not so notified will not survive, the contract does not “unequivocally” say so.

Ouch!

But none of this should be new. We were talking about the need for more explicit language in our survival provisions at least a decade ago at M&A Committee meetings of the ABA’s Business Law Section.

Jurisdictional Variety and Unequivocal Language

There are apparently several states that require “unequivocal language” specifying that the survival provision is, in fact, an agreed contractual statute of limitations shorter than the otherwise applicable one.

While Delaware might be somewhat less fussy, I would caution that we should assume otherwise. Don’t forget that a Delaware court also declared that there were no “magic words” required to disclaim reliance on extra-contractual representations, but subsequent cases seem to require just that.

And don’t forget that even when choosing Delaware law to govern your agreement, a case filed in another state could well apply its statute of limitations to the claim (because statutes of limitations are procedural, not substantive, law). If that were to occur, would that forum court, even purporting to apply Delaware law to the agreement, interpret the survival clause consistent with Delaware’s apparently more liberal approach, or would the forum court instead require the “unequivocal language” required by forum law, absent explicit language in the choice of law clause choosing Delaware’s statutes of limitations as applicable?

Moreover, when you are selecting another jurisdiction’s law as the governing law of your acquisition agreement, please remember that several states have specific statutes that restrict the period for which a contractually shorter statute of limitations is permissible—so even unequivocal language will not always do the trick.

Examples of Effective Clauses

As examples of clauses that seem to do a fairly good job of addressing these issues (assuming there is no state law prohibition on shortening the otherwise applicable statute of limitations, and without suggesting that both examples couldn’t use some improvement), see the clauses below, which were plucked randomly from recently filed private company acquisition agreements.

Example of a “no survival” clause:

Section 10.1. Survival. The Parties, intending to modify any applicable statute of limitations, agree that, except in the case of claims solely against Seller for Fraud, (a) (i) the representations and warranties contained in this Agreement and in any certificate delivered hereunder and (ii) the covenants and agreements set forth herein that require performance at or prior to Closing, shall, in each of (i) and (ii), terminate effective as of the Closing without the need for any further action by any Person and shall not survive the Closing for any purpose whatsoever, and thereafter there shall be no liability or obligation on the part of, nor shall any claim be made by, any party or any of their respective Affiliates or Non-Parties in respect thereof, in connection therewith or related thereto and (b) the covenants and agreements set forth herein that require performance after the Closing shall survive in accordance with their respective terms, if any, until fully performed. This Article X shall survive the Closing. The Parties specifically and unambiguously intend that the survival periods that are set forth in this Section 10.1 shall replace any statute of limitations that would otherwise be applicable. Notwithstanding anything to the contrary contained in this Agreement, nothing in this Agreement, including the limitations on survival set forth in this Section 10.1 shall limit the rights of Buyer or any Affiliate thereof under the R&W Insurance Policy, which shall be solely governed by the rights as set forth thereunder.

Example of a “limited survival” clause (clause (b) being the important clarification):

9.1 Survival

(a) Subject to Section 9.1(b), each representation and warranty contained in ARTICLE IV and ARTICLE V (other than the Seller Fundamental Representations and the Purchaser Fundamental Representations) shall survive the Closing and shall terminate on the twelve (12) month anniversary of the Closing Date. The Specified Representations shall survive the Closing and remain in full force and effect until the expiration of the applicable statute of limitations (taking into account any extensions or waivers thereof), and the Seller Fundamental Representations and the Purchaser Fundamental Representations shall survive the Closing and remain in full force and effect indefinitely after the Closing Date; provided, that the expiration of any of the terms set out in this Section 9.1(a) shall not affect the rights of a Party to seek recovery of Losses arising out of Fraud. The covenants and agreements contained in this Agreement shall survive until performance in accordance with their terms.

(b) Notwithstanding anything herein to the contrary, the obligations to indemnify and hold harmless a Person pursuant to this ARTICLE IX in respect of a breach of representation or warranty, covenant or agreement shall terminate on the applicable survival termination date (as set forth in Section 9.1(a)), unless an Indemnified Party shall have made a claim for indemnification pursuant to Section 9.2 or Section 9.3, subject to the terms and conditions of this ARTICLE IX (or Section 6.8(d), as applicable), prior to such survival termination date, as applicable, including by delivering an Indemnification Claim Notice or Third Party Indemnification Claim, as applicable, to the Indemnifying Party. Notwithstanding anything herein to the contrary, if an Indemnified Party has made a claim for indemnification pursuant to Section 9.2 or Section 9.3 and delivered an Indemnification Claim Notice or Third Party Indemnification Claim, as applicable, to the Indemnifying Party prior to such survival termination date, then such claim (and only such claim), if then unresolved, shall not be extinguished by the passage of the deadlines set forth in Section 9.1(a).

Remember, as transactional lawyers, we need to be continuously learning and remembering what we have learned. There is more to the practice than just being a document processor.