FREE online courses on Mergers & Acquisitions - Chapter 2 - Indemnification

 

Another important element within the M & A Agreement is indemnification. The M & A Agreement will specify the nature and extent to which each company can recover damages should a misrepresentation or breach of contract occur. A "basket" provision will stipulate that damages are not due until the indemnification amount has reached a certain threshold. If the basket amount is exceeded, the indemnification amount becomes payable at either the basket amount or an amount more than the basket amount. The seller (Target Company) will insist on having a ceiling for basket amounts within the M & A Agreement.

 

Since both sides may not agree on indemnification, it is a good idea to include a provision on how disputes will be resolved (such as binding arbitration). Finally, indemnification provisions may include a "right of sell off" for the buyer since the buyer has deposited part of the purchase price into an escrow account. The Right to Sell Off allows the buyer (acquiring company) to offset any indemnification claims against amounts deferred within the purchase price of the merger. If the purchase price has been paid, then legal action may be necessary to resolve the indemnification.