Legal Blog

M & A Nuggets: Indemnification – Let’s Get Specific No. 1


One of my prior nuggets discussed the importance of having a good indemnification clause in the purchase agreement.  Many important sub-issues arise during the negotiation of the indemnification clause.  One of those sub-issues is the amount of the indemnification.  There are two different amounts that are typically negotiated in an indemnification clause.  First, there is usually an amount established (a floor) below which the indemnification obligation does not exist, that is, does not kick in until the floor amount is met.  One sub-sub-issue arises on the negotiation of the floor amount.  When the damages equal or exceed the floor, will the purchaser have the right to recover all damages from dollar zero (a basket), including the amount of the floor, or just all damages in excess of the floor (a deductible)?  The other “amount” issue that is negotiated is the total amount of loss that a seller will be responsible for.  There is usually a maximum amount agreed to.  It may be the purchase price, a fraction of the purchase price or some other arbitrary amount that the parties agree to.  On losses relating to some claims, such as environmental and tax claims, there are often no dollar limits on the seller’s responsibility.  When negotiating these dollar limits on indemnification, as with all contract issues, the seller and purchaser need to be practical and weigh both the likelihood that a claim will arise and the cost that would be incurred if a claim does arise.


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Glenn D. Solomon Esq., is a principal at the law firm of Offit Kurman and has provided counsel to businesses and business owners for more than twenty-five years, with extensive experience in the purchase and sale of businessesstructuring ownership agreements, and advising companies in financial distress






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