Indemnification

Indemnification is a contractual obligation where one party agrees to compensate another for specified losses, commonly used in M&A to protect buyers from undisclosed liabilities.

How Indemnification Works

1. Seller makes representations (statements of fact)
2. Buyer discovers breach post-closing
3. Buyer makes indemnification claim
4. Seller compensates buyer for losses

Key Indemnification Terms

Cap: Maximum seller liability

• Often 10-20% of purchase price for general reps
• May be 100% for fundamental reps

Basket: Minimum loss before claims allowed

• Deductible: Claims over basket, seller pays excess
• Tipping: Once basket exceeded, seller pays from dollar one

Survival Period: How long claims can be made

• General reps: 12-24 months
• Fundamental reps: 3-6 years
• Tax reps: Statute of limitations

Types of Representations

Fundamental (higher protection):

• Ownership and authority
• Capitalization
• No undisclosed liabilities

General (standard protection):

• Financial statement accuracy
• Material contracts
• Employee matters
• Compliance with laws

Indemnification Negotiation

Seller Friendly	Buyer Friendly
Lower caps	Higher caps
Higher baskets	Lower baskets
Shorter survival	Longer survival
Deductible basket	Tipping basket