Legal Blog

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

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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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ABOUT GLENN D. SOLOMON

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

 

 

 

 

ABOUT OFFIT KURMAN

Offit Kurman is one of the fastest-growing, full-service law firms in the Mid-Atlantic region. With 120 attorneys offering a comprehensive range of services in virtually every legal category, the firm is well positioned to meet the needs of dynamic businesses and the people who own and operate them. Our eight offices serve individual and corporate clients in the Maryland, Delaware, New Jersey, and Northern Virginia markets, as well as the Washington DC, Baltimore, Philadelphia, and New York City metropolitan areas. At Offit Kurman, we are our clients’ most trusted legal advisors, professionals who help maximize and protect business value and personal wealth. In every interaction, we consistently maintain our clients’ confidence by remaining focused on furthering their objectives and achieving their goals in an efficient manner. Trust, knowledge, confidence—in a partner, that’s perfect.

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