Understanding Indemnification Terms in M&A Transactions: Key Considerations for Buyers and Sellers

In M&A transactions, purchase agreement indemnification terms ensure both buyers and sellers get what they bargained for in deals. What should you and your M&A attorney look out for?

  • Appropriate reps and warranties, modified as appropriate by materiality, knowledge and other qualifiers (noting that the basket, discussed below, may serve as a surrogate for materiality qualifiers for non-fundamental reps).
  • Full and responsive disclosures on the disclosure schedules.
  • What reps are considered “fundamental” and, consequently, often have longer survival periods and are not subject to caps, baskets, and other limitations.
  • Appropriate survival periods for fundamental reps (often, the statute of limitations plus 60 days) and non-fundamental reps (usually, 12-24 months).
  • Deal-size and transaction appropriate baskets.
  • Deal-size appropriate caps.
  • Appropriate definition of “Damages” or “Losses” that are subject to indemnification (for sellers, this often means the exclusion of punitive, indicential, consequential, and other special damages).
  • Indemnification procedures, particularly with respect to offsets and holdbacks (for example, does the obligation have to be agreed to or finally judicially determined before an offset or holdback release occurs?).
  • Materiality scrapes, the duty to mitigate damages, adjustments for insurance proceeds and tax benefits, the limitations on indemnification as an exclusive remedy, and other terms.
  • Does using representation and warranty insurance (RWI) make sense? If so, it can give the buyer and seller comfort, and shortcut a lot of the legal wrangling over reps and indemnification.

As you can see, there’s plenty of concepts and jargon to fuel a whole series of posts. We’ll spare you that (for now), but the message is to reach out to your M&A attorney early, particularly as indemnification and other legal terms are now being handled with greater frequency at the LOI stage.

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