Indemnification Provisions Contained in Mergers and Acquisitions Agreements
For more than 40 years, Robert M. Mendell, Attorney at Law, P.C., has served Texas individuals and business entities. Attorney Mendell gives his personal attention to all matters handled by the firm. He is Board Certified in Tax Law by the Texas Board of Legal Specialization and is also licensed as a Certified Public Accountant (CPA).
The firm represents buyers and sellers in mergers and acquisitions transactions of all sizes in a variety of industries. Mr. Mendell can assist clients interested in buying a business enterprise with appropriate protection coverage afforded through inclusion of sophisticated indemnification provisions contained in the mergers and acquisitions transaction agreement. He can also serve sellers by negotiating for a fair purchase agreement to attempt to mitigate the seller’s potential indemnification liability provided for in such agreements.
Thorough Due Diligence Representation in Mergers And Acquisitions
There are numerous moving parts in most mergers and acquisitions transactions, making engagement of an experienced M&A attorney important. For M&As, the firm offers reliable counsel for a full gamut of issues the client may encounter, including the precise wording of indemnification and related damages provisions, some of which may relate to the following matters:
- Consequential, Indirect and Special Damages as a Measure of Damages: These are common types of damages that buyers often try to include in indemnification provisions. The inclusion of these damages increases the seller’s potential liability.
- Survival Periods: This refers to the length of time after which a representation or warranty is no longer in effect. Generally, a survival period lasts for a certain period of time after the closing on the business acquisition. This allows the buyer to detect potential material defects that their due diligence may have missed.
- Tiered Survival Periods/Carveouts/Fraud: Certain warranties and representations may have survival periods of different lengths, known also as tiered survival periods. Longer survival periods are beneficial to buyers, while short periods are beneficial to sellers. Fundamental representations and fraud may have longer or indefinite survival periods.
- Ceilings: A ceiling is the dollar limit to the damages a buyer may recover against a seller. Naturally, sellers seek lower ceilings and buyers seek higher ceilings. The ceiling is a common point of negotiation, sometimes in exchange for tiered ceilings.
- Baskets: In an indemnification claim, the basket is an established base amount. The seller does not pay damages to the buyer until the basket has been achieved. Baskets are often either “deductible” baskets or “tipping” baskets.
- Responsibility for Sales Tax on Sale of the Business: Many sellers try to rely on Texas’ sale tax exemption, as the seller is generally requested to assume the responsibility for sales or other transfer tax that may be due upon the sale of the business or its assets.
- Sandbagging Provision: This is a provision often inserted in the purchase agreement by the buyer that provides that the buyer’s pre-closing knowledge of a breach of warranty does not eliminate the seller’s liability for indemnification.
- Diminutions in Value as Measure of Damages: Buyers often wish to include “diminutions in value” as a form of recoverable damage against the seller. In sales where the business’ value was determined by a multiple of earnings, the award could amount to multiples of the actual damages.
- Materiality Scrape: This is another pro-buyer provision often inserted in the purchase agreement by the buyer that can “scrape” certain materiality qualifiers identified in specific representations or warranties made by the seller for purposes of determining seller’s indemnification liability to the buyer, rendering such materiality qualifiers as essentially meaningless.
- Knowledge Scrape: In a similar vein, this is another pro-buyer provision often inserted in the purchase agreement by the buyer that can “scrape” certain knowledge qualifiers identified in specific representations or warranties made by the seller for purposes of determining seller’s indemnification liability to the buyer, rendering such knowledge qualifiers as essentially meaningless.
More detailed information relating to indemnification provisions can be found in this seminar handout prepared by Mr. Mendell: Business Acquisitions Seminar Handout.
Because he has represented both sellers and buyers, Mr. Mendell understands what each party is looking for and how to utilize his knowledge to advise his clients and advance their decisions in negotiating the M&A transaction documents. The firm has substantial experience and expertise in the handling of the many details of M&A transactions whether on behalf of the seller or the buyer.
Request A Consultation For M&A Representation
Reputable counsel is important for short-term and long-term business success for both buyers and sellers. To receive representation from the experienced firm of Robert M. Mendell, Attorney at Law, P.C. for your mergers and acquisitions matter, contact him at his office in Houston. Call 713-888-0700 or send an email.