Indemnification

Other than the reps and warranties, the indemnification provisions are typically the most heavily litigated.

Indemnification clauses are something that was mentioned in a previous unit as being important to protect one’s client. Who is responsible for legal issues after the deal closes, i.e., who is going to assume the risks and to what extent?

Let’s be sure that you understand what it means to “indemnify.” To indemnify means to compensate an individual for a harm or a loss. Indemnification provisions allow a party to outline or customize the risk it is willing to undertake with respect to the other side, and to protect oneself from liability and damages that may arise from claims arising out of the transaction.

There are different types of risks that we may need to protect our client from:

• Financial risk
• Operational risk
• Product Liability risk
• Legal risk

The indemnification clause will cover losses attributable to a breach in the contract (usually the reps and warranties). For example, if the seller warrants that they will pay off a loan on a truck that the purchaser is purchasing, but fails to do so, the purchaser will seek indemnification from the seller (if the purchaser has to pay it). It is simply a way to recompense the harmed party, here the purchaser.

📖 Read Ryan M. Newburn, “Indemnification Clauses in M&A Agreements” and review the components of a typical indemnification clause. Also read, Daniel Avery, “Trends in M&A Provisions: Indemnity Caps.”