The buyer of a privately-held business usually seeks to impose only on the seller (and often its owners) financial responsibility for breaches of representations and covenants in the acquisition agreement and for other specified matters that may not be the subject of representations. The conflict between the buyer’s desire for that protection and the seller’s desire not to have continuing responsibility for a business which it no longer owns often results in intense negotiations.

The resulting acquisition agreement typically begins with sections relating to the determination of the amount, form (cash, securities or other property) and time of payment of the purchase price. These sections are followed by representations and covenants of both seller and buyer and finally provisions for indemnification for breach of the representations and covenants. Since transaction structures and the bargaining position of the parties vary widely, there is no such thing as a “standard” indemnification section. There are, however, common structures for the indemnification provisions which appear toward the back of the purchase agreement: (1) provide that the parties’ representations survive the closing and thus are available as the basis for post-closing monetary remedies and perhaps to negate defenses based on knowledge and implied waiver; (2) define the matters for which the seller (and perhaps its owners) and the buyer have post-closing monetary liability, including from inaccuracies in representations and breaches of covenants; (3) sometimes require seller to indemnify for specific matters such as environmental liabilities, intellectual property matters and contingencies that may not be adequately covered by the more general indemnification provisions; (4) set forth levels of damage below which post-closing monetary remedies are not available (i.e., “baskets”) and maximum levels for contractual post-closing monetary remedies (i.e., “caps”); (5) the time periods during which post-closing monetary remedies may be sought; (6) set-off rights against any promissory note or other deferred consideration to be paid as part of the purchase price; (7) procedures to be followed for, and in the defense of, third party claims; (8) procedures for matters not involving third party claims; and (9) finally a provision that the indemnification provided for in the indemnification section is applicable notwithstanding the negligence of the indemnitee or the strict liability imposed on the indemnitee...

Originally published at the The University Of Texas School Of Law's 10th Annual Mergers And Acquisitions Institute Dallas, TX - October 17, 2014.