In private company M&A, indemnification provisions allocate the risk of certain post-closing losses between buyer and seller. These losses may arise from breaches of representations and warranties, violations of covenants, or liabilities that precede closing but materialize after the transaction.
From the buyer’s perspective, indemnification is the contractual mechanism to seek recovery. From the seller’s perspective, it’s a tool that defines and limits post-closing liability.
Well-structured indemnification provisions are essential to prevent ambiguity and disputes. For sellers, careful attention to indemnification terms is critical to ensuring that liability is appropriately scoped, limited in duration and amount, and not left to subjective or open-ended interpretation.
Indemnification obligations are not typically indefinite. The survival period determines how long after closing a party can bring a claim.
Practical Tip: Buyers should ensure that the survival periods match the nature and scope of the underlying obligations. For example, a tax covenant or a non-compete should survive long enough to cover the applicable statute of limitations.
Indemnification typically applies to losses arising from:
Sellers should seek to narrowly define the scope of “losses” and ensure that the definition excludes speculative, indirect, or punitive damages unless expressly agreed.
SRS Acquiom’s 2025 Deal Terms Study notes that 97% of deals define losses to include actual damages, but only a minority cover consequential or special damages.
Indemnity limits protect sellers from unlimited liability and promote efficient claim resolution.
Mini-baskets may also apply to individual claims.
Certain categories of claims, especially those tied to fundamental representations, fraud, or post-closing covenants, are typically excluded from caps and baskets.
Sellers should work with counsel to implement custom indemnification provision drafting that balances market terms with the specific risks and dynamics of their transaction.
Buyers almost always negotiate a carveout for fraud, meaning claims based on fraud are not subject to caps, baskets, or survival limits.
Sellers should seek a narrow and precise definition of “fraud” in the agreement. The most seller-favorable definitions limit fraud to intentional misrepresentations made with actual knowledge and specific intent to deceive by a named individual.
Without clear fraud definitions, buyers may attempt to recharacterize ordinary indemnity claims as fraud, defeating the purpose of negotiated liability limits.
Materiality scrapes remove “material” qualifiers when determining whether a breach has occurred and calculating the amount of loss.
Buyers prefer scrapes to avoid the burden of proving materiality. Sellers should resist scrapes or negotiate them carefully to prevent de minimis claims from exceeding baskets.
Sellers should seek to narrowly define the scope of “losses” and ensure that the definition excludes speculative, indirect, or punitive damages unless expressly agreed.
SRS Acquiom’s 2025 Deal Terms Study notes that 97% of deals define losses to include actual damages, but only a minority cover consequential or special damages.
Indemnity limits protect sellers from unlimited liability and promote efficient claim resolution.
Mini-baskets may also apply to individual claims.
Certain categories of claims, especially those tied to fundamental representations, fraud, or post-closing covenants, are typically excluded from caps and baskets.
Sellers should work with counsel to implement custom indemnification provision drafting that balances market terms with the specific risks and dynamics of their transaction.
Buyers almost always negotiate a carveout for fraud, meaning claims based on fraud are not subject to caps, baskets, or survival limits.
Sellers should seek a narrow and precise definition of “fraud” in the agreement. The most seller-favorable definitions limit fraud to intentional misrepresentations made with actual knowledge and specific intent to deceive by a named individual.
Without clear fraud definitions, buyers may attempt to recharacterize ordinary indemnity claims as fraud, defeating the purpose of negotiated liability limits.
Materiality scrapes remove “material” qualifiers when determining whether a breach has occurred and calculating the amount of loss.
Buyers prefer scrapes to avoid the burden of proving materiality. Sellers should resist scrapes or negotiate them carefully to prevent de minimis claims from exceeding baskets.
Even well-crafted indemnification rights are only as good as their enforceability. That’s where escrow arrangements come into play.
In seller-indemnified deals, a portion of the purchase price (typically 5–10%) is held in escrow for the survival period to cover potential claims. The release mechanics, scope of application, and procedures for releasing funds are typically set forth in a separate escrow agreement.
Escrows may be structured to:
If a representation and warranty insurance policy (RWI) is used, the size and scope of escrows may be reduced or eliminated for certain risks.
Indemnification exposure stems directly from breaches of representations and warranties. Understanding the relationship between these provisions is critical for sellers.
The seller’s exposure will largely turn on:
Fundamentally, sellers should push for accurate, narrow, and appropriately qualified reps, supported by comprehensive disclosure schedules.
General reps cover the operating aspects of the business and are typically based on the seller’s knowledge and due diligence. These might include, but are not limited to:
These reps are where most claims occur, but also where the bulk of the seller’s protections reside.
Fundamental reps, on the other hand, go to the heart of the transaction. They are core assertions about the seller’s authority to do the deal and the target’s legal existence and ownership.
Typical fundamental reps include:
Indemnity for fundamental reps is usually:
For example, a breach in capitalization could result in a post-closing ownership dispute—something buyers expect to be covered long after closing and without limitation.
Sellers should understand that the carveouts for fundamental reps are not mere formalities. These provisions often carry the most significant long-tail liability, and warrant close negotiation over both scope and wording.
Indemnification applies not only to breaches of reps but also to breaches of covenants. However, covenants behave differently:
Sellers should ensure:
Representation and warranty insurance (RWI) has reshaped how indemnity is allocated.
Key characteristics:
However:
Sellers using RWI should ensure the acquisition agreement is tailored to match the policy structure and coordinate closely with RWI counsel during negotiation.
Disputes over indemnity claims are common. Clear processes reduce the risk of escalation.
Key mechanics to define:
Many agreements include a stepped dispute resolution process: negotiation, followed by mediation or arbitration, and only then litigation. Sellers should ensure they have the right to participate in or control certain third-party claims, particularly where their reputation or business interests are at stake.
Indemnification is inherently adversarial. The buyer wants broad recovery; the seller wants narrow, time-limited exposure.
General reps cover the operating aspects of the business and are typically based on the seller’s knowledge and due diligence. These might include, but are not limited to:
Indemnification is a risk-allocation game. Well-advised sellers focus on aligning liability with their knowledge and control of the business.
Linden Law Partners regularly advises sell-side clients on structuring and negotiating indemnification terms to protect post-closing value.
