What is the Legal Doctrine of “Surviving The Closing?”

When you are buying or selling a San Diego business, there will be a sales contract. Among the provisions of sales contract will be various “representations and warranties” made by the various parties. A “representation” is a factual statement. A common example would be a seller’s representation that the seller “is the owner of the business.” A “warranty” is the seller’s guaranty that the representation is true and that the seller will defend the truth of the statement in a court of law. The combination of a representation and a warranty allows the buyer to sue for fraud and to have, potentially, the whole transaction become a nullity, as if the transaction and the contract had never been.

Under many circumstances, the representation and warranties written in the sales contract are extinguished at the closing of the deal. However, the parties can provide in the sales contract that the representations and warranties will “survive the closing.” Buyers, in particular, want most, if not all, of the representations and warranties to survive the closing. Here is what you need to know.

San Diego Corporate Law: What is the Merger Doctrine?

The “closing” is the time when the deal is finished — that is, the money has been paid and the buyer has received the “keys” or the goods or whatever is being purchased. Under California law, representations and warranties made in a sales contract are treated as extinguished, as of the closing date, and cannot give rise to liability after the closing date. This is what is called the “merger doctrine.”

San Diego Corporate Law: What is the Purpose of the Merger Doctrine?

In general, the purpose of the merger doctrine is to give finality to sales transactions — to have and create closure, a sense that everyone has received the benefit of their bargain and that the deal has been fully performed. As with respect to real estate sales, one California court phrased it this way:

“The general rule, long recognized in California, is that where a deed is executed in pursuance of a contract for the sale of land, all prior proposals and stipulations are merged, and the deed is deemed to express the final and entire contract between the parties. … The theoretical basis for the rule is that “the acceptance of the deed is, prima facie, full performance of the contract to convey.” Ram’s Gate Winery, LLC v. Roche, 235 Cal. App. 4th 1071 (Cal. App. 1st Dist. 2015) (citations and internal quotations omitted).

This doctrine is most often seen with respect to real estate contracts; but the same principles apply to the sale and purchase of a business even if the sale/purchase does not involve land or real property. As a buyer, you want the seller to represent and warrant that, for example, there are no competing claims to ownership of the intellectual property that you are buying (as an example). You want that representation and warranty to survive the closing.

San Diego Corporate Law: What is Surviving the Closing?

There are some exceptions to the merger doctrine which are created by law. For example, under some circumstance, the law imputes a representation and warranty of “suitability for intended use.” By law, that representation and warranty continues to exist after the closing.

As discussed herein, the more important exceptions to the merger doctrine are created by the parties to the contract. The parties can — and almost always should — state in the sales contract that certain representations and warranties will continue to exist beyond the date of the closing — that is, survive the closing. As noted, the BUYER receives greater protection when the representations and warranties survive the closing. Thus, a seller and a seller’s attorney will seek to limit the representations and warranties and seek to prevent them — or some of them — from surviving the closing. The buyer and the buyer’s attorney will seek to do the opposite.

San Diego Corporate Law: A Well-Drafted Contract is Important

It is important that the sales contract be carefully written. In determining whether representations and warranties survive the closing, the courts will look to the intent of the parties (as expressed in the written contract). The Ram’s Gate case cited above is a good example. The sales contract in that case was deemed by the California Court of Appeals to be ambiguous — not carefully drafted. As such, a trial was required to determine if certain representations and warranties survived the closing. An experienced and talented corporate attorney can help ensure there are no ambiguities in your contract. It is important to protect your rights as a buyer or seller post-closing.

Buying or Selling a San Diego Business: Contact San Diego Corporate Law

For more information, contact Michael Leonard, Esq. of San Diego Corporate Law by email or by calling (858) 483-9200. Mr. Leonard has the experience to ensure that you have a well-drafted sales contract that protects your legal rights and to help with the sale or purchase of a San Diego business.

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