August 13, 2019

Indemnification: Chancery Says Buyer’s Notice of Claim Was Sufficient

The indemnification provisions contained in most acquisition agreements require any notice of a potential indemnity claim to lay out its factual basis in reasonable detail.  Smart buyers are pretty meticulous when it comes to the language of any such notice, because they know that sellers are going to flyspeck that notice in an effort to find deficiencies & avoid potential indemnity obligations.

In Horton v. Organogenesis, (Del. Ch.; 7/19), the Delaware Chancery Court was called upon to interpret the requirements of a contractual notice provision.  Here’s an except from this Morris James blog describing the notice requirement and the buyer’s approach to it:

In Horton, the seller agreed that indemnification claims would survive if the buyer provided by June 24, 2018 written notice “stating in sufficient detail the nature of, and factual and legal basis for, any such claim for indemnification” and an estimate and calculation of the amount of Losses, if known, resulting therefrom. The buyer timely sent a notice of indemnification with one-paragraph descriptions of the factual and legal basis of each of its five claims, which it said “may involve breaches of representations and warranties in the Merger Agreement.”

The plaintiffs challenged the adequacy of the notice because it failed to reference the specific sections of the merger agreement that were breached.  The blog says that the Court rejected that argument:

The Court found the buyer’s one-paragraph descriptions sufficient even though the buyer did not specify the specific sections of the merger agreement it claimed were breached. This was because “sellers are charged with knowledge of their representations and warranties in the Merger Agreement.”

The buyer’s victory wasn’t complete, however – portions of its complaint seeking indemnity for pending litigation were dismissed as unripe, because the buyer did not allege that it had as yet suffered any “Losses” from that litigation as defined in the merger agreement.

John Jenkins