Structuring Special Indemnity Funds For Disputed Merger Equity Claims
A segregated indemnity fund holds disputed merger consideration in escrow, ring-fencing capitalization claims and funding defense costs until legal release.
zero basket indemnity
Meaning
A contractual provision in an acquisition agreement that requires the seller to compensate the buyer for any and all losses from the first dollar of a claim is used to maximize buyer protection. This zero basket indemnity contrasts with deductible or first-dollar thresholds, where claims must reach a minimum aggregate amount before the seller has any liability. Under this term, the buyer is protected against even minor breaches from the moment the transaction is completed.
Allocation of Risk
Shifting all financial risk of minor breaches to the seller creates a highly secure position for the buyer. A zero basket indemnity means that any discrepancy in the seller’s representations, no matter how small, must be paid for by the seller. Negotiating this term is common when the buyer has doubts about the quality of the company’s historical records.
This provision forces the seller to be exceptionally careful and accurate in their disclosures.
Diligence Demands
Preparing for an acquisition under such strict terms requires the selling company to conduct an exhaustive internal audit of its operations. The seller must ensure that every contract, employee record, and tax filing is perfectly documented to avoid minor claims under the zero basket indemnity. This preparation can consume hundreds of hours of executive and legal time before the transaction closes.
The consequence of failing to identify a minor issue can be a series of post-closing claims that erode the net proceeds of the sale.
Negotiation Value
Determining the price and terms of a sale involves balancing the purchase price against the level of indemnity protection. Sellers often accept a lower purchase price to avoid a zero basket indemnity, preferring the peace of mind offered by a deductible threshold. Conversely, buyers may pay a premium when they secure this absolute protection against historical liabilities.
This trade-off is a central point of negotiation in almost all mid-market corporate acquisitions.