Meaning
A contractual promise by a selling entity to compensate an acquirer for specific post-closing losses or liabilities constitutes a primary risk allocation mechanism in corporate acquisitions. A seller indemnity protects buyers against unrecorded tax assessments or breaches of historical representations contained in purchase agreements. The obligation terminates upon the expiration of agreed survival periods or the exhaustion of monetary liability caps.
Loss Allocation
Drafting indemnification obligations establishes clear risk boundaries between acquirers and target company equity holders. When a seller indemnity is negotiated, parties define deductibles and maximum financial caps that govern future breach claims. Indemnification provisions establish whether buyers recover defense costs alongside direct damages arising from pre-closing activities.
Exclusions routinely apply to known liabilities disclosed on schedule attachments during transaction diligence. Written indemnity language governs whether recourse extends to selling founders individually or remains capped at escrow funds.
Escrow Mechanism
Acquirers secure potential recovery claims by withholding a portion of purchase proceeds in third-party escrow accounts. Escrow releases follow agreed timelines unless pending indemnity notices freeze fund disbursements.
Claim Limitation
Contractually agreed survival periods limit the timeframe during which buyers can submit indemnification notices for representation breaches. Environmental and tax representations maintain extended limitation periods compared to general corporate representations.
