M&A Nuggets: Indemnification – The Seller’s Risk, The Buyer’s Shield

A large part of any agreement for the purchase and sale of a business relates to indemnification.  But what exactly does indemnification mean?  In plain English, indemnification means that the seller is required to reimburse the purchaser for its monetary losses, including legal fees, sustained as a result of the seller’s breach of the purchase agreement.  While indemnity provisions are always present in a purchase agreement, the terms of the indemnity vary and are subject to much negotiation.  The tension in the negotiation exists because of the conflicting desire of the purchaser to be compensated for a seller breach versus a seller’s desire not to be on the hook to the purchaser for unlimited amounts and an unlimited period of time.  The negotiations around the indemnity therefore fall into three categories.  First, exactly what is the seller agreeing to indemnify the buyer for.  Second,  over what period of time can the purchaser seek indemnity from the seller.  And third, what is the total amount the purchaser can recover from the seller.  There are subcategories that are negotiated within each of these three categories.  While industry norms have developed regarding the time period and total dollar amounts that a seller is responsible for under an indemnity, there are no black and white rules, and the indemnity provisions deservedly need much attention.