tax code (i.e., the period in which the IRS could assess an additional tax liability for a pre-closing period) for the
survival of tax reps and warranties in a purchase agreement, the period during which a buyer may make claims on
a breach of such tax reps and warranties will terminate in 3 years under Delaware law and in 6 years under New
York law, regardless of the underlying applicable statute of limitations period.
Tolling
Similarly, M&A purchase agreements typically provide that if a claim is properly made within the specified survival
period, the statute of limitations applicable to such claim will be tolled or suspended until such claim is fully settled
and resolved. Again, notwithstanding such contractual language, the statute of limitations may in fact apply and any
such suit brought after the expiration of the statute of limitations (even if notice of the claim was timely delivered)
may be time-barred.
Extending the Applicable Statute of Limitations with Infrequently Used “Sealed” Contracts
With careful drafting, appropriate jurisdiction selection and the use of a “sealed” contract, it is possible to draft
purchase agreements with reps and warranties enforceable for the terms intended by the parties. Buyers, of
course, will favor longer survival periods, and if such longer terms are negotiated, ensuring that these survival
clauses are enforceable is vital.
Delaware law, for example, provides for a 20-year statute of limitations for contracts complying with the requisite
formalities to constitute an agreement executed “under seal.” Such 20-year period can then be reduced to the
desired length for each rep and warranty. Thus, if the purchase agreement is properly executed “under seal,” the
survival provision can specify that (i) the general reps and warranties shall survive for, say, 18 months, (ii) the tax
reps and warranties shall survive for 6 years plus 60 days, (iii) the fundamental reps and warranties shall survive for
20 years and (iv) any claim with respect to which notice is properly delivered may survive for the specified time
period negotiated by the parties (provided such time period is not longer than the 20-year anniversary of the
contract). Execution under seal also extends the statute of limitations to 20 years for contracts governed by
Massachusetts law but has no effect on contracts governed by New York or California law. The formalities required
to execute a contract under seal vary by jurisdiction.
As discussed above, when negotiating survival provisions in purchase agreements, it is important to not only
understand the interplay between the survival period set forth in the purchase agreement and the applicable statute
of limitations, but to also consult an expert in the event of any uncertainty in order to ensure that the parties’
intended negotiated terms are not only reflected in the purchase agreement, but also are enforceable. For further
information, please contact the authors of this alert or your regular counsel at Mintz Levin.
Post Script
The Delaware legislature has recently proposed revisions to the Delaware law governing the 3-year statute of
limitations for breach of contract that would, if adopted, permit parties to certain contracts to opt out of the 3-year
statute of limitation period that would otherwise apply and give effect to a longer limitations period (up to 20 years)
without requiring the parties to enter into a contract “under seal.”
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View Mintz Levin’s Mergers & Acquisitions attorneys.