A materiality scrape — also called a materiality read-out — is a common provision in private merger and acquisition transactions. It tends to favors the buyer in these negotiations. The materiality scrape “scrapes” — or excludes — materiality and other similar materiality qualifiers in a seller's representations and warranties for post-closing indemnification.


A materiality scrape can be an important part of a transaction in terms of dividing the responsibility for a company's liabilities. However, the importance of the provision as well as its overall significance to the risk profile in a merger and acquisition is often not fully appreciated.

In a business sale, a seller usually makes a series of warranties and factual representations about the business to a buyer. The scope of these warranties and representations is often the subject of major negotiations between both parties. In terms of “give and take,” it's important to determine which warranties and representations will be qualified as to the knowledge and/or materiality of the seller.

Similar qualifiers may be added to a merger/acquisition agreement in order to govern closing conditions and the parties' indemnification obligations.

These types of qualifiers serve some practical purposes. For example:

  • They limit a seller's warranties and representations to a buyer.
  • They limit disclosures that a seller has to make to a buyer.
  • They determine if a breach of a seller's warranties and representations has occurred.
  • They determine the total losses that result from a breach of warranties and representations.
  • They determine if the parties have satisfied conditions to closing the sale.

Warranties and representations are the breaches most often subject to a materiality scrape. You may find agreements or covenants — or an obligation to either do or not do something — subject to these provisions. However, this is less common.

You'll most often find qualities such as “materiality” or “material adverse effect" (MAE) subject to materiality scrapes. Less often, you'll find “knowledge scrapes.” These eliminate knowledge qualifiers.

About Materiality Scrapes

Unfortunately, materiality scrapes present some problems.

For example, when determining the total damages resulting from inaccurate representation, materiality qualifications are to be disregarded. Logic dictates that a materiality qualification should only count when determining whether a representation is accurate.

However, an aggressive buyer may attempt to expand the materiality scrape to read out knowledge qualifiers in a seller's representations. The buyer may also try to apply those to covenants in the acquisition agreement.

The usual materiality scrape provision may sometimes be referred to as a “double" materiality scrape. This means that it applies for determining if a breach has actually occurred and the amount of indemnified losses that result from the breach.

Still, it's not uncommon to apply a materiality scrape to determine the total losses but not to determine if a breach has actually occurred. This is a “single” materiality scrape.

The Purpose of Including Materiality Qualifiers in a Purchase Agreement

There are different reasons to include materiality and MAE qualifiers in a purchase agreement, as they have different effects. The materiality scrape may eliminate some of the qualifiers of those purposes but not all of them.

Materiality and MAE qualifiers are usually relevant in the following contexts:

  • To determine whether closing conditions have been met. For example, closing conditions might require that the warranties and representations made by the seller are true in all material respects at the time of closing or that there are no MAEs in effect at the time of closing.
  • To determine the extent of a seller's disclosure. For instance, a representation may require the disclosure of all “material” contracts.
  • To determine whether a breach of representation has occurred. In this instance, qualifiers are used to find out if a seller has presented some specific facts contrary to the representation.
  • To determine the total losses resulting from a breach. In other words, when a representation is qualified by materiality, are resulting losses subject to indemnity only above a “material amount?”

Large corporations that take part in mergers and acquisitions always have legal counsel involved in the negotiations process. Even if your business is small- to medium-sized, it's important to have professional legal guidance when conducting business transactions.

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